RareMetals Inc. sells a rare metal found only in underdeveloped countries overseas. As a result of unstable governments in these countries and the rarity of the metal, the price fluctuates significantly. Financial information is given assuming the use of the first-in, first-out (FIFO) method of inventory valuation and also the last-in, first-out (LIFO) method of inventory valuation. Current assets other than inventory total $1,230 and cur- rent liabilities total $1,600. The ending inventory balances are $1,350 for FIFO and $525 for LIFO.
RareMetals Inc. Income Statements (in Thousands)
|
|
FIFO
|
LIFO
|
|
Net sales
|
$3,000
|
$3,000
|
|
Cost of goods sold
|
1,400
|
2,225
|
|
Gross profit
|
1,600
|
775
|
|
Selling, general, and administrative
|
600
|
600
|
|
Operating profit
|
1,000
|
175
|
|
Interest expense
|
80
|
80
|
|
Earnings before taxes
|
920
|
95
|
|
Provision for income taxes
|
322
|
33
|
|
Net earnings
|
$ 598
|
$ 62
|
Required
(a) Calculate the following ratios assuming RareMetals Inc. uses the FIFO method of inventory valuation: gross profit margin, operating profit margin, net profit margin, current ratio, and quick ratio.
(b) Calculate the ratios listed in (a) assuming RareMetals Inc. uses the LIFO method of inventory valuation.
(c) Evaluate and explain the differences in the ratios calculated in (a) and (b).
(d) Will cash flow from operating activities differ depending on the inventory valuation method used? If so, estimate the difference and explain your answer.