ACCOUNTING ALTERNATIVES AND FINANCIAL ANALYSIS
Shady Deal Automobile Sales Company has asked your bank for a $100,000 loan to expand its sales facility. Shady Deal provides you with the following data:
| |
2009 |
2008 |
2007 |
|
Sales revenue
|
$6,100,000
|
$5,800,000
|
$5,400,000
|
|
Net income
|
119,000
|
112,000
|
106,000
|
|
Ending inventory (FIFO)*
|
665,000
|
600,000
|
500,000
|
|
Purchases
|
5,370,000
|
5,105,000
|
4,860,000
|
|
Depreciable assets
|
1,240,000
|
1,150,000
|
1,090,000
|
*The 2006 ending inventory was $470,000 (FIFO).
Your inspection of the financial statements of other automobiles sales firms indicates that most of these firms adopted the LIFO method in the late 1970s. You further note that Shady Deal has used 5 percent of depreciable asset cost when computing depreciation expense and that other automobile dealers use 10 percent. Assume that Shady Deal's effective tax rate is 25 percent of income before tax. Also assume the following:
|
|
2009
|
2008
|
2007
|
|
Ending inventory (LIFO)*
|
$508,000
|
$495,000
|
$480,000
|
*The 2006 ending inventory was $470,000 (LIFO).
Required:
1. Compute cost of goods sold for 2007-2009, using both the FIFO and the LIFO methods.
2. Compute depreciation expense for Shady Deal for 2007-2009, using both 5 percent and 10 percent of the cost of depreciable assets.
3. Recompute Shady Deal's net income for 2007-2009, using LIFO and 10 percent depreciation. (Don't forget the tax impact of the increases in cost of goods sold and depreciation expense.)
4. Explain whether Shady Deal appears to have materially changed its financial state- ments by the selection of FIFO (rather than LIFO) and 5 percent (rather than 10 percent) depreciation.