Dot Company began operations in 2012. At the beginning of the year, the company purchased plant assets

Question:

Dot Company began operations in 2012. At the beginning of the year, the company purchased plant assets of $900,000, with an estimated useful life of 10 years and no residual value. During the year, the company had net sales of $1,300,000, salaries expense of $200,000, and other expenses of $80,000, excluding depreciation. In addition, Dot purchased inventory as follows:

At the end of the year, a physical inventory disclosed 500 units still on hand. The managers of Dot know they have a choice of accounting methods, but they are unsure how those methods will affect net income. They have heard of the FIFO and LIFO inventory methods and the straight-line and double-declining-balance depreciation methods.

REQUIRED
1. Prepare two income statements for Dot Company, one using the FIFO and straight-line methods and the other using the LIFO and double-declining-balance methods. Ignore income taxes.
2. Prepare a schedule accounting for the difference in the two net income figures obtained in 1.
3. What effect does the choice of accounting method have on Dot€™s inventory turnover? What conclusions can you draw? Use the year-end balance to compute the ratio.
4. How does the choice of accounting methods affect Dot€™s return on assets? Assume the company€™s only assets are cash of $80,000, inventory, and plant assets. Use year-end balances to compute the ratios. Is your evaluation of Dot€™s profitability affected by the choice of accounting methods? Explain youranswer.