Case Scenario:
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. Currents assets other than inventory total $1.230 and current liabilities total $1,600. The ending inventory balance are $1,350 for FIFO and $525 for LIFO.
REQUIRED TO DO:
Problem 1: Calculate the following ratios assuming RareMetals Inc. uses the FIFO method if inventory valuation: gross profit margin, operating profit margin, net profit margin, current ratio, and quick ratio.
Problem 2: Calculate the ratios listed in (a) assuming RareMetals Inc. uses the LIFO method of inventory valuation.
Problem 3: Evaluate and explain the differences in the ratios calculated in (a) and (b).
Problem 4: Will cash flow from operating activities differ depending on the inventory valuation method used? If so, estimate the difference and explain your answer.
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RareMetals Inc. Income Statements (In Thousands) |
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FIFO |
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LIFO |
| Net sales |
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$3,000 |
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$3,000 |
| Cost of goods sold |
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1,400 |
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2,225 |
| Gross profit |
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1,600 |
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775 |
| Selling, general, and administrative |
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600 |
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600 |
| operating profit |
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1,000 |
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175 |
| Interest expense |
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80 |
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80 |
| Earnings before taxes |
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920 |
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95 |
| Provision for income taxes |
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322 |
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33 |
| Net earnings |
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$598 |
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62 |