Question

Cooper Company currently uses the FIFO method to account for its inventory but is considering a switch to LIFO before the books are closed for the year. Selected data for the year are:
Merchandise inventory, January 1 $1,430,000
Current assets 3,603,600
Total assets (operating) 5,720,000
Cost of goods sold (FIFO) 2,230,800
Merchandise inventory, December 31 (LIFO) 1,544,400
Merchandise inventory, December 31 (FIFO) 1,887,600
Current liabilities 1,144,000
Net sales 3,832,400
Operating expenses 915,200
1. Compute the current ratio, inventory turnover ratio, and rate of return on operating assets assuming the company continues using FIFO.
2. Repeat part (a) assuming the company adjusts its accounts to the LIFO inventory method.

Answer 1

Answer:

Cooper Company

1. FIFO:

Current ratio

= 3.15

Inventory turnover ratio

= 1.34

Rate of return on operating assets

= 12%

2. LIFO:

Current ratio

= 2.85

Inventory turnover ratio

= 1.73

Rate of return on operating assets

= 12.8%

Explanation:

a) Data and Calculations:

Merchandise inventory, January 1 $1,430,000

Current assets 3,603,600

Total assets (operating) 5,720,000

Cost of goods sold (FIFO) 2,230,800

Merchandise inventory, December 31 (LIFO) 1,544,400

Merchandise inventory, December 31 (FIFO) 1,887,600

Current liabilities 1,144,000

Net sales 3,832,400

Operating expenses 915,200

                                                                               FIFO

Merchandise inventory, December 31 (FIFO) $1,887,600

Cost of goods sold (FIFO)                                 2,230,800

Goods available for sale                                   $4,118,400

Merchandise inventory, January 1                    1,430,000  

Purchases                                                       $2,688,400

LIFO:

Goods available for sale                                  $4,118,400

Merchandise inventory, December 31 (LIFO)  1,544,400

Cost of goods sold (LIFO)                             $2,574,000

Income Statements                             FIFO             LIFO

Net sales                                       $3,832,400   $3,832,400

Cost of goods sold (FIFO)              2,230,800     2,574,000

Gross profit                                    $1,601,600    $1,258,400

Operating expenses                         915,200          915,200

Net income                                     $686,400       $343,200

Merchandise inventory, December 31 (LIFO) 1,544,400

Merchandise inventory, December 31 (FIFO) 1,887,600

Difference between FIFO and LIFO =              343,200

                                                                 FIFO           Difference    LIFO

Current assets                                       3,603,600     343,200    3,260,400

Total assets (operating)                        5,720,000     343,200     5,376,800

Cost of goods sold (FIFO)                    2,230,800                        2,574,000

Merchandise inventory, January 1        1,430,000                        1,430,000

Merchandise inventory, December 31  1,887,600                        1,544,400

Current liabilities                                    1,144,000                         1,144,000

Average inventory                                1,658,800                        1,487,200

FIFO:

Current ratio = current assets/current liabilities

= $3,603,600/$1,144,000 = 3.15

Inventory turnover ratio = Cost of goods sold/Average Inventory

= $2,230,800/$1,658,800

= 1.34

Rate of return on operating assets = Net income/Total assets * 100

= $686,400/$5,720,000 * 100

= 12%

LIFO:

Current ratio = $3,260,400/$1,144,000

= 2.85

Inventory turnover ratio = $2,574,000/$1,487,200

= 1.73

Rate of return on operating assets = $686,400/$5,376,800 * 100

= 12.8%