Question

Exercise 5.18 LO 7,8 LIFO versus FIFO-impact on ROI Mannisto Inc. uses the FIFO inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $1,500,000 and average assets of $10,000,000. If Mannisto had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $300,000 more than under FIFO, and its average assets would have been $300,000 less than under FIFO. Required: a. Calculate the firm's ROI under each cost flow assumption (FIFO and LIFO). b. Suppose that two years later costs and prices were falling. Under FIFO, net! income and average assets were $1,800,000 and $12,000,000, respectively. If LIFO had been used through the years, inventory values would have been $200.000 less than under FIFO, and current year cost of goods sold would have been $100,000 less than under FIFO. Calculate the firm's ROI under flow assumption (FIFO and LIFO).

Answer 1

1) ROI= Net income/Average assets

Under FIFO method= $1500000*100/10000000= 15%

Under LIFO method

As under LIFO method, cost of goods sold have been more than FIFO method that means the net income under FIFO method must be greater than LIFO method

Net income under LIFO method= $1500000-300000= $1200000

Under LIFO method, the average assets is less than FIFO method

Average assets under LIFO method= $10000000-300000= $9700000

ROI= $1200000*100/9700000= 12.37%

2) Under FIFO method= $1800000*100/12000000= 15%

Under LIFO method

As under LIFO method, cost of goods sold have been less than FIFO method that means the net income under FIFO method must be less than LIFO method.

Net income under LIFO method= $1800000+100000= $1900000

Under LIFO method, the average assets is less than FIFO method

Average assets under LIFO method= $12000000-200000= $11800000

ROI= $1900000*100/11800000= 16.10%