The best answer to Borghi’s Question 2 is:

A. stable.

B. inflationary.

C. deflationary.

Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a comparative financial analysis between Crux and its two main competitors, Rolby Corp. and Mikko Inc. Crux and Mikko report under U.S. GAAP and Rolby reports under IFRS.

Groff gathers information on Crux, Rolby, and Mikko. The relevant financial information he compiles is in Exhibit H. Some information on the industry is in Exhibit I.

To compare the financial performance of the three companies, Groff decides to convert LIFO figures into FIFO figures, and adjust figures to assume no valuation allowance is recognized by any company.

After reading Groff ’s draft report, his supervisor, Rachel Borghi, asks him the following questions:

Question 1: Which company’s gross profit margin would best reflect current costs of the industry?

Question 2: Would Rolby’s valuation method show a higher gross profit margin than Crux’s under an inflationary, a deflationary, or a stable price scenario?

Question 3: Which group of ratios usually appears more favorable with an inventory write- down?

Transcribed Image Text:

EXHIBIT H Selected Financial Information (US$ millions) Crux LIFO Inventory valuation method From the Balance Sheets As of 31 December 2009 Inventory, gross Valuation allowance Inventory, net Total debt Total shareholders' equity As of 31 December 2008 Inventory, gross Valuation allowance Inventory, net From the Income Statements Year Ended 31 December 2009 Revenues Cost of goods sold Net income 480 20 460 1,122 2,543 465 23 442 4,609 3,120 229 13 Rolby FIFO 620 25 595 850 2,403 602 15 587 5,442 3,782 327 15 Mikko LIFO 510 14 496 732 2,091 401 12 389 3,503 2,550 205 15