yet another Qbank question on inventory additional, question, another, balance, instead

richer

here is the question

Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):

Total Assets 11,800,000
Inventory 2,400,000
Common Stock 1,000,000
Retained Earnings 1,500,000



LIFO Reserve at Jan. 1
600,000

LIFO Reserve at Dec. 31
900,000


Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:

A) 3.73

B) 4.18

C) 4.06


Your answer: A was incorrect. The correct answer was C) 4.06



With FIFO instead of LIFO:

Inventory would be higher by $900,000, the amount of the ending LIFO reserve.
Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.
Cumulative retained earnings would be higher by (0.60)($900,000) = $540,000.
So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000 / $3,040,000 = 4.06.



Edited 1 time(s). Last edit at Monday, April 19, 2010 at 12:24PM by lzen5.