1.) RareMetals Inc. sells a rare metal found only in underdeveloped countries overseas. As a result of unstable governments in these countries and the rarity of the metal, the price fluctuates significantly. Financial information is given assuming the use of the first in, first out (FIFO) method of inventory valuation and also the last-in, first out (LIFO) method of inventory valuation. Current assets other than inventory total $1,230 and current liabilities total $1,600. The ending inventory balances are $1,350 for FIFO and $525 for LIFO.

RareMetals Inc. Income Statements (in Thousands)

FIFO LIFO

Net Sales $3,000 $3,000

Cost of goods sold 1,400 2,225

Gross profit 1,600 775

Selling, general, and administrative 600 600

Operating profit 1,000 175

Interest expense 80 80

Earnings before taxes 920 95

Provision for income taxes 322 33

Net earnings $ 598 $ 62

1. Calculate the following ratios assuming RareMetals Inc. uses the FIFO method of inventory valuation: gross profit margin, operating profit margin, net profit margin, current ratio, and quick ratio.
2. Calculate the ratios listed in (a) assuming RareMetals Inc. uses the LIFO method of inventory valuation.
3. Evaluate and explain the differences in the ratios calculated in (a) and (b).
4. Will cash flow from operating activities differ depending on the inventory valuation method used? If so, estimate the difference and explain your answer.