Question

This information is available for the Automotive and Other Operations Divisions of General Motors Corporation for 2006. General Motors uses the LIFO inventory method.
(in millions) 2006
Beginning inventory $13,862
Ending inventory 13,921
LIFO reserve 1,508
Current assets 64,131
Current liabilities 67,822
Cost of goods sold 164,682
Sales 172,927

(a) Calculate the inventory turnover ratio and days in inventory. (Round turnover ratio to 3 decimal places, e.g. 15.250 and days in inventory to 1 decimal place, e.g. 20.5.)
(b) Calculate the current ratio based on inventory as reported using LIFO. (Round answer to 2 decimal places, e.g. 0.55.)
(c) Calculate the current ratio after adjusting for the LIFO reserve. (Round answer to 2 decimal places, e.g. 0.55.)

Answer 1

Answer:

A. Inventory turnover ratio = 5.927

B. Current ratio = 0.95

C. Current ratio after adjusting for the LIFO reserve =  0.97

Explanation:

Requirement A

We know,

Inventory turnover ratio = Cost of goods sold ÷ Average inventory

Given,

Cost of goods sold = 164,682

Average inventory = Beginning inventory + Ending inventory

Average inventory = $13,862 + $13,921

Average inventory = $27,783

Putting the values into the formula, we will get

Inventory turnover ratio = Cost of goods sold ÷ Average inventory

Inventory turnover ratio = $164,682 ÷ $27,783

Inventory turnover ratio = 5.927

We know,

Days in inventory = $365 ÷ $5.927

Days in inventory = 61.6 days

Requirement B

We know,

Current ratio = Current asset ÷ Current liabilities

Given,

Current asset = $64,131

Current liabilities = $67,822

Putting the values into the formula, we can get

Current ratio = Current asset ÷ Current liabilities

Current ratio = $64,131 ÷ $67,822

Current ratio = 0.95

We know,

The current ratio shows us how a company pays its current liabilities.

We assume the inventory is reported in the current asset using the LIFO method.

Requirement C

We know,

Current ratio after adjusting for the LIFO reserve = (Current asset + LIFO reserve) ÷ Current liabilities.

Given,

Current asset = $64,131

LIFO reserve = 1,508

Current liabilities = $67,822

Putting the values into the formula, we can get

Current ratio after adjusting for the LIFO reserve = (Current asset + LIFO reserve) ÷ Current liabilities

Current ratio after adjusting for the LIFO reserve = ($64,131 + 1,508) ÷ $67,822

Current ratio after adjusting for the LIFO reserve = 65,639 ÷ $67,822 = 0.97

Current ratio after adjusting for the LIFO reserve =  0.97