chapter_06 - 1Chapter 6 Liquidity of Short-term Assets:...

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Unformatted text preview: 1Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability TO THE NET 1. a. SIC Cooper Tire 3011 Tires & Inner Tubes Kroger Co. 5411 Retail-Grocery Stores b. Cooper Tire will have a higher current ratio. The nature of Coopers business will result in higher relative inventories and receivables than Kroger. c. Cooper Tire December 31, 2001 Current assets $952,097,000 = 1.47 Current liabilities $647,905,000 Kroger Co. February 2, 2002 Current asset $5,512,000,000 = 1.00 Current liabilities $5,485,000,000 Yes. Results agreed with speculation in part (b). 2. Eastman Kodak a. Net receivables at December 31,2001 $2,337,000,000 b. Gross receivables at December 31, 2001 could not determine c. Inventory method LIFO, FIFO, and Average Cost method Inventories are stated at the lower of cost or market. The cost of most inventories in the U.S. is determined by the last-in, first-out (LIFO) method. The cost of all of the companys remaining inventories in and outside the U.S. is determined by the first-in, first-out (FIFO) or average cost method, which approximates current cost. The company provides inventory reserves for excess, obsolete or slow- moving inventory based on changes in customer demand, technology developments or other economic factors. 107 3. Sears, Roebuck & Co. a. Inventory balance December 31, 2001 December 30, 2000 $4,912,000,000 $5,618,000,000 b. Approximately 80% of merchandise inventories are valued at the lower of cost or market, with cost determined using the retail inventory method (RIM) under the last-in, first-out (LIFO) cost flow assumption. Merchandise inventories of Sears Canada operations in Puerto Rico and NTB stores, which in total represent approximately 12% of merchandise inventories, are recorded at the lower of cost or market based on the FIFO method. c. If the first-in, first-out (FIFO) method of inventory valuation had been used instead of the LIFO method, merchandise inventories would have been $591 and $566 million higher at December 29, 2001 and December 30, 2000, respectively. 108 QUESTIONS 6- 1. In the very short run, the procedure of making more funds available by slowing the rate of payments on accounts payable would work and the firm would have more funds to purchase inventory, which would in turn enable the firm to generate more sales. This procedure would not work very long because creditors would demand payment and they may refuse to sell to our firm or demand cash upon delivery. In either case, the end result would be the opposite of what was intended. 6- 2. When a firm is growing fast, it needs a large amount of funds to expand its inventory and receivables. At the same time, payroll and payables require funds. Although Jones Wholesale Company has maintained an above average current ratio for the wholesale industry, it has probably built up inventory and receivables, which require funds. The inventory and the receivables are probably being carried for longer periods of time than the credit terms received on the...
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chapter_06 - 1Chapter 6 Liquidity of Short-term Assets:...

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