Question & Answer: Presented below are the financial statements of two companies that are identical in every respect except the method of valuing their inventories. Th…..

IFO versus LIFO: Ratio Analysis. FI are identical in every respect except the method of valuing their inventories. The method of valuing inventory is LIFO for the LIFO Company and FIFO for the FIFO Company Presented below are the financial statements of two companies that T Comparative Income Statements LIFO Company $20,000,000 11,280,000 8,720,000 (5,000,000) $ 3,720,000 FIFO Company Sales. $20,000,000 9,200,000 10,800,000 (5,000,000) Gross proft, : . .. Less: Operating expenses Net income before tax .. Comparative Balance Sheets Assets 5,800,000 FIFO Company LIFO Company Cash. 3,000,000 S 3,000,000 6,000,000 1,720,000 6,000,000 3,800,000 12,800,000 20,000,000 Inventory. Total current assets . . Total noncurrent (net) 10,720,000 20,000,000 . $30,720,000 Liabilities and Equities 9,000,000 9,000,000 13,200,000 17,520,000 $30,720,000 5 13,200,000 19,600,000 Total shareholders equity Required Using the two sets of financial statements, calculate the ratios below for each firm. Ignore the effect of taxes (i.e., assume zero taxes for both firms). 1. Current ratio 2. Inventory turnover 3. Inventory-on-hand period 4. Return on assets 5. Total debt to total assets 6. Long-term debt to shareholders equity 7. Gross profit margin ratio 8. Return on sales 9. Return on shareholders equity 10. Earnings per share (assume 2 million shares outstanding) Based on the above ratios, which company represents the better investment opportunity? The better acquisition opportunity? The better lending opportunity? Why?

Presented below are the financial statements of two companies that are identical in every respect except the method of valuing their inventories. The method of valuing inventory is LIFO for the LIFO Company and LIFO for the FIFO Company. Using the two sets of financial statements, calculate the ratios below for each firm. Ignore the effect of taxes (i.e.. assume zero taxes for both firms). 1. Current ratio 2. Inventory turnover 3. Inventory-on-hand period 4. Return on assets 5. Total debt to total assets 6. Long-term debt to shareholders’ equity 7. Gross profit margin ratio 8. Return on sales 9. Return on shareholders’ equity 10. Earnings per share (assume 2 million shares outstanding) Based on the above ratios, which company represents the better investment opportunity? The better acquisition opportunity? The better lending opportunity? Why?

Expert Answer

		FIFO Company	LIFO Company
Current Ratio	Current Assets / Current Liabilities	12800000 / 4200000	10720000 / 4200000
		3.0476	2.5524



Inventory Turnover	Cost of Goods Sold / Average Inventory	9200000 / 3800000	11280000 / 1720000
		2.4211	6.5581


Return on Assets	Net Income / Average Total Assets	5800000 / 32800000	3720000 / 30720000
		17.68%	12.11%


Total Debt to Total Assets	Total Liabilities / Total Assets	13200000 / 32800000	13200000 / 30720000
		0.4024	0.4297

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