Tom Hanky, a financial analyst specializing in the toy industry, has provided the following comments concerning the 1999 financial statements of Toys-U-Must:

Toys-U-Must began operations in 1999 and uses the LIFO method in costing its inventories. Because the typical firm in the industry uses FIFO costing, it is desirable to adjust the company’s financial statements “as if”FIFO costing had been used. Footnotes to the financial statements reveal that the use of FIFO would increase the company’s inventory valuation by $150 million, and that the company’s income is taxed at 40%.

Required Based on Hanky’s comments,explain how each of the following items would be adjusted in Toys-U-Must’s 1999 financial statements:

a. Inventory

b. Working capital (current assets less current liabilities)

c. Gross margin

d. Income tax expense

e. Net income

f. Retained earnings g. At the end of 2000,Toys-U-Must’s financial statement footnotes reveal that the use of FIFO costing would increase the company’s ending inventory valuation by $200 million (the effects on the beginning inventory were described above). Explain how each of the following items would be adjusted in order to convert the company’s reported accounts “as if” the firm had used FIFO costing during 2000: 1. Inventory 2. Working capital 3. Gross margin 4. Income tax expense 5. Net income 6. Retained earnings E-967