Question

Mannisto, Inc., uses the FIFO inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $244,087 and average assets of $1,550,550. If Mannisto had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $44,110 more than under FIFO, and its average assets would have been $40,630 less than under FIFO.
a) Calculate the firm's ROA under each cost flow assumption.
b) Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $288,567 and $1,880,970, respectively. If LIFO had been used through the years, inventory values would have been $45,690 less than under FIFO, and current year cost of goods sold would have been $22,660 less than under FIFO. Calculate the firm's ROA under each cost flow assumption.

Answer 1

Answer and Explanation:

a. The solution of return on assets under each cost flow is described below:-

Return on assets under FIFO = Net income ÷ Average total assets

= $244,087 ÷ $1,550,550

= 15.7%

Return on assets under LIFO = Net income ÷ Average total assets

= ($244,087 - $44,110) ÷ ($1,550,550 - $40,630)

= $199,977 ÷ $1,509,920

= 13.2%

b. The computation of return on assets under each cost flow is shown below:-

Return on assets under FIFO = Net income ÷ Average total assets

= $288,567 ÷ $1,880,970

= 15.3%

Return on assets under LIFO = Net income ÷ Average total assets

= ($288,567 + $22,660) ÷ ($1,880,970 - $45,690)

= $311,227 ÷ $1,835,280

= 17%