Refrigerated Trucks (RT) Company buys large refrigerated trucks from the manufacturer and sells them to companies and independent truckers. Because of the high cost of financing its inventory, RT tries to maintain as small an inventory as possible. In fact, at the beginning of July, the company had no inventory or liabilities, as shown on the balance sheet that follows.

On July 9, 2011, RT took delivery of a truck, for which it paid $150,000. On July 19, it took delivery of an identical truck, for which it paid $160,000. On July 28, it sold one of the trucks for $195,000. During July, RT’s expenses totaled $15,000. All trans-actions were paid in cash.

1. Assuming an income tax rate of 40 percent and using (a) the FIFO method of inventory valuation and (b) the LIFO method, prepare an income statement and balance sheet for RT on July 31. Explain the effects of each method on these financial statements.

2. Assume that RT’s management has a policy of declaring a cash dividend each period exactly equal to net income. What effects does this policy have on the financial statements prepared in requirement 1? How do the balance sheets of July 31 compare with the balance sheet on July1? Which inventory method, if either, do you think is more realistic in representing RT’s income?

3. Assume that RT receives notice of a price increase of $10,000 on trucks to take effect on August 1. How does this information relate to management’s dividend policy, and how will it affect next month’s operations?

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RT Company Balance Sheet July 1, 2011 Assets Stockholders' Equity Cash Total assets 400,000 400,000 Common stock Total stockholders' equity $400,000 400,000