KP_Ch3 HWSolns

# KP_Ch3 HWSolns - Created by: Babu G. Baradwaj For: Kidwell...

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Created by : Babu G. Baradwaj Instructor Manual Created on: May 11, 2009 Chapter 3 Principles of Financial Management Revised IM # 02 Questions and Problems Basic 3.1. Balance Sheet: Given the following information about the Elkridge Sporting Goods, Inc., construct a balance sheet for the period ending June 30, 2008. The firm had cash and marketable securities of \$25,135, accounts receivables of \$43,758, inventory of \$167,112, net fixed assets of \$325,422, and other assets of \$13,125. It had accounts payables of \$67,855, notes payables of \$36,454, long-term debt of \$223,125, and common stock of \$150,000. How much retained earnings does the firm have? Solution: ASSETS Book Value LIABILITIES Book Value Cash 25,135 \$ Accounts Payables 67,855 \$ Accounts Receivables 43,758 \$ Notes Payables 36,454 \$ Inventories 167,112 \$ Total Current Assets 236,005 \$ Total Current Liabilities 104,309 \$ Net Fixed Assets 325,422 \$ Long Term Debt 223,125 \$ Other Assets 13,125 \$ Common Stock 150,000 \$ Retained Earnings 97,118 \$ TOTAL ASSETS 574,552 \$ TOTAL LIABILITIES & EQUITY 574,552 \$ 3.2. Inventory Accounting: Differentiate between FIFO and LIFO. Solution: FIFO (first in, first out) refers to the practice of firms, when making sales, assuming that the inventory that came in first (at a lower price) being sold first. LIFO (last in, last out) implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet. 3.3. Inventory Accounting: Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement. Page 1 of 6

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Created by : Babu G. Baradwaj Instructor Manual Created on: May 11, 2009 Chapter 3 Principles of Financial Management Revised IM # 02 Solution: FIFO makes sense during times of rising prices because it allows the firm to eliminate the lower priced inventory fist resulting in higher profit margin. This allows the firm to leave higher valued inventory on the balance sheet. During inflationary times, a firm using LIFO would see a lower profit margin and lower values of inventory on the balance sheet. It is important for anyone analyzing firms using different accounting methods on inventory to recognize the impact on the
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## This note was uploaded on 09/29/2008 for the course FIN 300 taught by Professor Olander during the Fall '08 term at ASU.

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KP_Ch3 HWSolns - Created by: Babu G. Baradwaj For: Kidwell...

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