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Unformatted text preview: ACCT1511 TUTORIAL PREPARATION QUESTIONS WEEK 11 Which company will report the higher ratio? 1 Current ratio (CA/CL) Depreciation method will have no impact on the current ratio. Inventory policy will have an impact on inventory valuation on the Balance Sheet. JFA uses FIFO and therefore will have inventory at current prices on the Balance sheet. JRU uses LIFO and therefore will have inventory at historic prices on the Balance sheet. Assuming inflation, JFA will have higher asset values and therefore a higher Current ratio. 2 Inventory turnover Depreciation method will have no impact (COGS/Avg. Inventory) on the inventory turnover ratio. Inventory policy will have an effect on both COGS and Inventory balances. JFA uses FIFO and therefore will have inventory at current prices on the Balances sheet and historic prices in COGS. JRU uses LIFO and therefore will have inventory at historic prices on the Balance sheet and current prices in COGS. JRU will have a higher COGS figure and a lower average inventory figure; therefore, will report a higher inventory turnover. 3 Profit margin Inventory method and depreciation (NPAT/Sales) method will both have an impact on NPAT. Neither method will have an impact on sales. JFA will report a higher profit (lower COGS and lower depreciation using straight line method) than JRU. JFA will therefore report a higher profit margin ratio. Problem 14.27 Ratio Assumptions Rising prices (inflation) Assuming COGS > Average Inventory (inventory at year end generally would be higher than the total amount sold during the year). Assuming increasing prices (inflation). Assumes that the depreciable assets are in the first half of their useful lives. Inflation is also assumed. *Note: For Problem 14.27, assume (i) the depreciable assets are in the first half of their useful life and (ii) inflation. ...
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This note was uploaded on 03/19/2012 for the course ACCT 1511 taught by Professor Kim during the Three '10 term at University of New South Wales.
- Three '10