Loose-leaf for Fundamentals of Financial Accounting with Connect
5th Edition
ISBN: 9781259619007
Author: Fred Phillips Associate Professor
Publisher: McGraw-Hill Education
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Chapter 13, Problem 13.13ME
Analyzing the Impact of Accounting Alternatives
Nevis Corporation operates in an industry where costs are falling. The company is considering changing its inventory method from FIFO to LIFO and wants to determine the impact that the change would have on selected accounting ratios in future years. In general, what impact would you expect on the following ratios: net profit margin, fixed asset turnover, and
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Which of the following statements is most correct?
Select one:
A. A company with a current ratio of 0.5, should purchase additional inventory on credit if it wants to improve this ratio.
B. Return on assets is a function of two variables, the profit margin and current asset turnover.
C. A company with a current ratio of 0. 5, should sell some of the existing inventory at cost if it wants to improve this ratio.
D. Firms with low rates of return on stockholders’ equity tend to sell at relatively high ratios of market price to book value.
The management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense.
Assuming that the price the company pays for inventory is increasing, which method will:
(a) provide the highest net income?
(b) provide the highest ending inventory?
|(c) result in the lowest income tax expense?
(d) result in the most stable earnings over a number of years?
The management of Norton Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will:
(a) provide the highest net income?
(b) result in the most stable earnings over a number of years?
(c) result in the lowest income tax expense?
(d) provide the highest ending inventory?
Chapter 13 Solutions
Loose-leaf for Fundamentals of Financial Accounting with Connect
Ch. 13 - What is the general goal of trend analysis?Ch. 13 - Prob. 2QCh. 13 - What is ratio analysis? Why is it useful?Ch. 13 - What benchmarks are commonly used for interpreting...Ch. 13 - Prob. 5QCh. 13 - Prob. 6QCh. 13 - Slow Cellars current ratio increased from 1.2 to...Ch. 13 - From last year to this year, Colossal Companys...Ch. 13 - From last year to this year, Berry Bam reported...Ch. 13 - Explain whether the following situations, taken...
Ch. 13 - What are the two essential characteristics of...Ch. 13 - Prob. 12QCh. 13 - Prob. 13QCh. 13 - Prob. 14QCh. 13 - Prob. 15QCh. 13 - Prob. 16QCh. 13 - 1. Which of the following ratios is not used to...Ch. 13 - Prob. 2MCCh. 13 - Prob. 3MCCh. 13 - Analysts use ratios to a. Compare different...Ch. 13 - Which of the following ratios incorporates stock...Ch. 13 - Prob. 6MCCh. 13 - Prob. 7MCCh. 13 - A bank is least likely to use which of the...Ch. 13 - Prob. 9MCCh. 13 - (Supplement 13A) Which of the following items is...Ch. 13 - Calculations for Horizontal Analyses Using the...Ch. 13 - Calculations for Vertical Analyses Refer to M13-1....Ch. 13 - Interpreting Horizontal Analyses Refer to the...Ch. 13 - Interpreting Vertical Analyses Refer to the...Ch. 13 - Prob. 13.5MECh. 13 - Prob. 13.6MECh. 13 - Prob. 13.7MECh. 13 - Analyzing the Inventory Turnover Ratio A...Ch. 13 - Inferring Financial Information Using the Current...Ch. 13 - Prob. 13.10MECh. 13 - Identifying Relevant Ratios Identify the ratio...Ch. 13 - Prob. 13.12MECh. 13 - Analyzing the Impact of Accounting Alternatives...Ch. 13 - Describing the Effect of Accounting Decisions on...Ch. 13 - Prob. 13.1ECh. 13 - Prob. 13.2ECh. 13 - Prob. 13.3ECh. 13 - Computing Profitability Ratios Use the information...Ch. 13 - Prob. 13.5ECh. 13 - Matching Each Ratio with Its Computational Formula...Ch. 13 - Computing and Interpreting Selected Liquidity...Ch. 13 - Prob. 13.8ECh. 13 - Prob. 13.9ECh. 13 - Prob. 13.10ECh. 13 - Prob. 13.11ECh. 13 - Prob. 13.12ECh. 13 - Prob. 13.13ECh. 13 - Prob. 13.14ECh. 13 - Analyzing the Impact of Alternative Inventory...Ch. 13 - Prob. 13.1CPCh. 13 - Analyzing Comparative Financial Statements Using...Ch. 13 - Prob. 13.3CPCh. 13 - Prob. 13.4CPCh. 13 - Prob. 13.5CPCh. 13 - Prob. 13.6CPCh. 13 - Prob. 13.7CPCh. 13 - Prob. 13.1PACh. 13 - Analyzing Comparative Financial Statements Using...Ch. 13 - Prob. 13.3PACh. 13 - Prob. 13.4PACh. 13 - Interpreting Profitability, Liquidity, Solvency,...Ch. 13 - Using Ratios to Compare Loan Requests from Two...Ch. 13 - Prob. 13.7PACh. 13 - Prob. 13.1PBCh. 13 - Prob. 13.2PBCh. 13 - Prob. 13.3PBCh. 13 - Prob. 13.4PBCh. 13 - Interpreting Profitability, Liquidity, Solvency,...Ch. 13 - Using Ratios to Compare Loan Requests from Two...Ch. 13 - Prob. 13.7PBCh. 13 - Prob. 13.1SDCCh. 13 - Prob. 13.2SDCCh. 13 - Prob. 13.5SDCCh. 13 - Prob. 13.6SDCCh. 13 - Prob. 13.7SDCCh. 13 - Prob. 13.1CC
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- The management of Milque Corp. is considering the effects of inventory-costing methods on its financial statements and its income tax expense. Assuming that the cost the company pays for inventory is increasing, which method will: (a) (b) (c) Provide the highest net income? Provide the highest ending inventory? Result in the lowest income tax expense? 10arrow_forwardExplain how LIFO, FIFO, and Weighted average inventory systems will have different affects on a firm’s income statement and balance sheet. If a firm was concerned about reducing their tax burden, which inventory system would best benefit them? Assume costs have been steadily rising over time.arrow_forwardThe management of Mastronardo Company is considering the effects of inventory-costing methods on its financial statements.Assuming that the price the company pays for inventory is increasing, which method will: a.  Provide the highest gross profit?  select a method                                        FIFOLIFOAverage-cost b.  Provide the highest ending inventory?  select a method                                        FIFOLIFOAverage-costarrow_forward
- The management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) provide the highest net income? Select the inventory-costing method that will provide the highest net income (b) provide the highest ending inventory? Select the inventory-costing method that will provide the highest ending inventory (c) result in the lowest income tax expense? Select the inventory-costing method that will result in the lowest income tax expense (d) result in the most stable earnings over a number of years? Select the inventory-costing method that will result in the most stable earnings over a number of yearsarrow_forwardAccountants at UltraTech obtain their values for inventory and total assets, calculate the balance sheet percentage by dividing inventory by total assets for each year and summarize the observations for the relative size of inventory to total assets for each year and percentage change from year-to-year. This would allow them to effectively assess: a. Inventory control compared to competitorsb. If there is an effective return on assetsc. If inventory is being properly managedd. How they are managing liabilitiesarrow_forward2.4 Would the shareholders be happy with the profitability of the company?     Use an appropriate ratio to motivate your answer.    2.5 Calculate the ratio for 2021 that reflects how the stock market is judging the company’s earnings performance and prospects.    2.6 Explain the impact on the cost of sales in the statement of comprehensive income if LIFO rather than FIFO method of valuing inventories is used during periods of rising prices.      INFORMATION Extracts of the statement of comprehensive income and statement of financial position of Silverstone Limited for 2021 and 2020 are as follows: Statement of Comprehensive Income for the year ended 31 December:   2021 (R)  2020 (R) Sales 6 400 000 5 440 000 Cost of sales 4 000 000 3 264 000 Gross profit 2 400 000 2 176 000 Operating expenses 960 000 1 056 000 Operating profit 1 440 000 1 120 000 Profit before tax 1 280 000…arrow_forward
- Your Task… Using your assigned financial statements calculate the required ratios below Indicate if the change from year to year is favorable or unfavorable. All values should be accurate to at least two decimal places. The expectation is to submit a professional report free of grammar and spelling errors and easy to read. Think of this as a menu you would be handing to a customer. All calculations are to be represented. Analysis of Profitability Gross Profit Ratio Operating Profit Ratio Net Profit Ratio Sales to Total Assets Ratio Return on Total Assets Return on Equity Earnings Per Sharearrow_forward3.What is the purpose of the current ratio? Assume that Island Solutions want to compute its current ratio, which inventory method (FIFO or Average Cost) would give a more meaningful current ratio. Explain. 4.Island Solutions has discovered that all of its competitors are using another inventory method and is worried. Can the company change its inventory accounting method, on what grounds? Discuss two (2) trade-offs for the company.arrow_forwardThe new owners of Sheraton Natural Foods Inc. have hired you to help them diagnose and cure problems that the company has had in maintaining adequate liquidity. As a first step, you perform a liquidity analysis. You then do an analysis of the company’s short-term activity ratios. Your calculations and appropriate industry norms are listed.  Ratio                                                               Sheraton         Industry Norm Current ratio                                                    4.5                  4.0 Quick ratio                                                       2.0                  3.1 Inventory turnover                                           6.0                  10.4 Average collection period                                 73 days            52 days Average payment period                                  31 days            40 days  Requirements: What recommendations relative to the amount and the handling of inventory could you make…arrow_forward
- Compose a financial analysis based on your evaluation of the ratios. Comparison between 2020E ratios and industry averages - (c) Asset utilization ratios; (1) Are the 2020E ratios above, below, or equal to the industryaverages? 2) Is this a good thing or a bad thing for the company? and (3) What can be done to improve the weak ratios or to maintainthe strong ones? (d) Profitability ratios (1) Are the 2020E ratios above, below, or equal to the industryaverages? ( 2) Is this a good thing or a bad thing for the company? and (3) What can be done to improve the weak ratios or to maintainthe strong ones? (e) Market performance ratios. (1) Are the 2020E ratios above, below, or equal to the industryaverages? ( 2) Is this a good thing or a bad thing for the company? and (3) What can be done to improve the weak ratios or to maintainthe strong ones?arrow_forwardTrade-Offs among Acceptable Accounting Alternatives. Firms value inventory under a variety of assumptions, including two common methods: last-in first-out (LIFO) and first-in first-out (FIFO). Ignore taxes, assume that prices increase over time, and assume that a firms inventory balance is stable or grows over time. Which inventory method provides a balance sheet that better reflects the underlying economics, and why? Which method provides an income statement that better reflects the underlying economics, and why?arrow_forwardWhat does the inventory turnover period ratio measure? Select one: a.Profitability. b.The average time an organisation holds inventory. c.The liquidity of the firm. d.How much the firm's current assets could decrease and still leave it able to pay its current liabilities.arrow_forward
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