CH 3 Finance - Homework for Chapter 3 Financial Statements...

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Homework for Chapter 3 Financial Statements, Cash Flows, and Taxes VIII. 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 receivable 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 and stockholders’ equity $574,552 3.2 Inventory accounting: Differentiate between FIFO and LIFO. Page 1 of 9
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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) is 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. Solution: FIFO makes sense during times of rising prices because it allows the firm to eliminate the lower priced inventory first, 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 that anyone who is analyzing firms using different accounting methods on inventory recognize the impact on the bottom line (profit margin and net income) and on current assets.
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  • Fall '08
  • Olander
  • Finance, Balance Sheet, Current Assets, Generally Accepted Accounting Principles, Total Current Liabilities, Total Current Assets

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