Ratio Calculations: Comprehensive Problem Including LIFO and FIFO
Two similar companies use different inventory valuation methods. In fact, the companies are identical except for their inventory methods. L Co. uses the LIFO inventory valuation method, and F Co. uses FIFO.
|
Income Statements |
L Co. |
F Co. |
|
Sales |
$ 30,000 |
$30,000 |
|
Cost of goods sold |
(21,280) |
(19,200) |
|
Gross profit |
8,720 |
10,800 |
|
Selling, general, and administrative |
(6,000) |
(6,000) |
|
Income before interest expense |
2,720 |
4,800 |
|
Interest expense (12%) |
(960) |
(960) |
|
Income before taxes |
$ 1,760 |
$ 3,840 |
|
Balance Sheets |
||
|
Assets |
||
|
Cash |
$ 4,000 |
$ 4,000 |
|
Accounts receivable |
5,000 |
5,000 |
|
Inventory |
2,720 |
4,800 |
|
Total current assets |
11,720 |
13,800 |
|
Fixed assets (net) |
30,000 |
30,000 |
|
Total assets |
$ 41,720 |
$43,800 |
|
Equities |
||
|
Current liabilities |
$ 3,200 |
$ 3,200 |
|
Long term liabilities |
8,000 |
8,000 |
|
Total liabilities |
11,200 |
11,200 |
|
Shareholders’ equity |
30,520 |
32,600 |
|
Total equities |
$ 41,720 |
$43,800 |
Required
Using the financial statements from LCo. And F Co. Calculate the following ratios (assume an income tax rate of 20%):
a. Current ratio
b. Accounts receivable as a percentage of sales
c. Average sales per day
d. Collection period
e. Gross profit percentage
f. Cost of goods sold per day
g. Number of days sales’ in ending inventory
h. Operating income ratio
i. Return on equity (assume that average shareholders’ equity for L and F Co. are $30,000 and $32,000, respectively)
j. Return on assets (assume that average total assets for L and F Co. Are $41,000 and $43,000, respectively) Based on these results (a through j, above), which company represents
k. The best lending alternative? Why?
l. The best investment alternative? Why?
m. The best acquisition alternative? Why?