Chapter 6_classDE

Chapter 6_classDE - Chapter 6 Exercise 6-8 (20 minutes) 1....

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Chapter 6 Exercise 6-8 (20 minutes) 1. a. LIFO ratio computations LIFO current ratio (2009) = $250/$225 = 1.1 LIFO inventory turnover (2009) = $760/ [($177+$110)/2] = 5.3 LIFO days’ sales in inventory (2009) = ($110/$760) x 365 = 52.8 days b. FIFO ratio computations FIFO current ratio (2009) = $410*/$225 = 1.8 FIFO inventory turnover (2009) = $680/ [($457+$270)/2] = 1.9 FIFO days’ sales in inventory (2009) = ($270/$680) x 365 = 144.9 days *$250 + ($270 - $110) 2. The use of LIFO versus FIFO for Cook markedly impacts the ratios computed. Specifically, LIFO makes Cook appear worse in comparison to FIFO numbers on the current ratio (1.1 vs. 1.8) but better on inventory turnover (5.3 vs. 1.9) and days’ sales in inventory (52.8 vs. 144.9). These results can be generalized. That is, when costs are rising and quantities are stable or rising, the FIFO inventory exceeds LIFO inventory. This suggests that (relative to FIFO) the LIFO current ratio is understated, the LIFO inventory turnover is overstated, and the days’ sales in inventory is understated. Overall, users prefer the FIFO numbers for these ratios because they are considered more representative of current replacement costs for inventory. Problem 6-2A (40 minutes) 1. Compute cost of goods available for sale and units available for sale Beginning inventory. ........................................... 770 units @ $50 $38,500 Feb. 10 420 units @ $41 17,220 Mar. 13. .......................................................... 260 units @ $25 6,500 Aug. 21. .......................................................... 180 units @ $49 8,820 Sept. 5........................................................... 585 units @ $42 24,570 Units available. ................................................... 2,215 units Cost of goods available for sale $95,610 2. Units in ending inventory Units available (from part
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Chapter 6_classDE - Chapter 6 Exercise 6-8 (20 minutes) 1....

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