Question

C. nents were used to com- Walmart uses LIFO to account for its inventories. Recent financial statements Wer pile the following information (dollar figures are in millions). LO8-1, L08-7 PROBLEM 8.8A FIFO versus LIFO Comparisons $ Average inventory (throughout the year) ....... Current assets (at year-end) Current liabilities (at year-end) ............ Sales ........ Cost of goods sold ............... Gross profit 45,000 63,278 65,272 482,229 365,086 117,143 Instructions a. Using the information provided, compute the following measures based upon the LIFO method. 1. Inventory turnover. 2. Current ratio (see Chapter 5 for a discussion of this ratio). 3. Gross profit rate (see Chapter 6 for a discussion of this statistic). b. Assuming cost of goods sold would be lower under FIFO, what circumstances must the com- pany have encountered to cause this situation? (Were replacement costs, on average, rising of falling?) c. How would you expect these ratios to differ (i.e., what direction) had the company used instead of LIFO?

How is this done???
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Answer 1

(a)

1. Inventory turnover ratio = Cost of goods sold / Average Inventory

= 365086/45000

= 8.11 times per year

This ratio indicates how fast inventory is sold.A high ratio is good from the viewpoint of liquidity & vice versa.

2. Current Ratio = Current Assets/ Current Liabilities

= 63278/65272

= 0.96

This ratio of a firm measures its short term solvency, that is, its ability to meet short term obligations

3. Gross profit rate = Gross profit / sales*100

= 117143/482229*100

= 24.30%

b. If its COGS would be lower then, its ending inventory would be on higher side due to which its average inventory went on higher side, then inventory turnover ratio will be on lower side.

companies margin would be on higher side due to which he would have to pay higher taxes.

its current assets can be increased due to which its current ratio shows normal(equal or more than 1)

c. If company opts FIFO method -

Inventory Turnover ratio = Lower (Down/Negative side) as explained in b part.

Current Ratio = Higher (Up/Positive Side) as Ending inventory is part of current assets due to which currrent assets grows therefore current ratio grows which is good for company.

Gross Rate - Higher/Upper, As COGS will go lower & sales remains constant, Gross Profit rate would go on upper side.

Please check with your answer and let me know.