Ratio Calculations: Effects of FIFO and LIFO
Two similar companies use different inventory valuation methods. LL Co. uses the LIFO inventory valuation method, and FF Co. uses FIFO. Ignore the effect of income taxes on each company.
|
Income Statements |
LL Co. |
FF Co. |
|
Sales |
$ 35,000 |
$35,000 |
|
Cost of goods sold |
(20,350) |
(18,200) |
|
Gross profit |
14,650 |
16,800 |
|
Selling, general, and administrative |
(6,000) |
(6,000) |
|
Income before interest expense |
8,650 |
10,800 |
|
Interest expense (12%) |
(960) |
(960) |
|
Income before taxes |
$ 7,690 |
$ 9,840 |
|
Balance Sheets |
||
|
Total current assets |
10,320 |
12,870 |
|
Fixed assets (net) |
29,000 |
31,000 |
|
Total assets |
$ 39,320 |
$43,870 |
|
Equities |
||
|
Current liabilities |
$ 3,120 |
$ 3,270 |
|
Long term liabilities |
8,000 |
8,000 |
|
Total liabilities |
11,120 |
11,270 |
|
Shareholders’ equity |
28,200 |
32,600 |
|
Total equities |
$ 39,320 |
$43,870 |
Required
Using the financial statements from LL Co. And FF Co., calculate the following ratios:
a. Current ratio
b. Average sales per day
c. Gross profit percentage
d. Cost of goods sold per day
e. Operating income ratio
f. Return on equity (use ending shareholders’ equity in the denominator)
g. Return on assets (use ending total assets in the denominator)
h. Based on these results (above),which company seems to be better managed? In which company would you prefer to make an equity investment? Explain.