Case 2. (Learning Objective 4: Analyzing the effects of an accounting difference on the ratios) Assume that

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Case 2. (Learning Objective 4: Analyzing the effects of an accounting difference on the ratios) Assume that you are a financial analyst. You are trying to compare the financial statements of CNH Global, an international company that uses international financial reporting standards (IFRS), to those of Caterpillar, Inc., which uses US GAAP. Caterpillar, Inc., uses the last-in, first-out (LIFO) method to account for its inventories. IFRS does not permit CNH Global to use LIFO. Analyze the effect of this difference in accounting methods on the two companies’ ratio values. For each ratio discussed in this chapter, indicate which company will have the higher (and the lower) ratio value. Also identify those ratios that are unaffected by the FIFO/LIFO difference. Ignore the effects of income taxes, and assume inventory costs are increasing. Then, based on your analysis of the ratios, summarize your conclusions as to which company looks better overall.

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Financial Accounting International Financial Reporting Standards Global Edition

ISBN: 9781292211145

11th Edition

Authors: Charles T. Horngren, C. William Thomas, Wendy M. Tietz, Themin Suwardy, Walter T. Harrison

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