Question
Astro Languet established Ayayai Products Co. as a sole proprietorship on January 5, 2020. At the companys year end of December 31, 2020, the accounts
Astro Languet established Ayayai Products Co. as a sole proprietorship on January 5, 2020. At the companys year end of December 31, 2020, the accounts had the following balances (in thousands):
Current assets, excluding inventory | $11 | |
Other assets | 122 | |
Current liabilities | 34 | |
Long-term bank loan | 57 | |
Owners investment (excluding income) | 45 | |
Purchases during year | ||
Jan. 2: 5,650 @ $11 | 62.15 | |
June 30: 9,040 @ $12 | 108.48 | |
Dec. 10: 6,780 @ $16 | 108.48 | |
279.11 | ||
Sales | 322.11 | |
Other expenses | 46.00 |
A count of ending inventory on December 31, 2020, showed there were 4,520 units on hand. Astro is now preparing financial statements for the year. He is aware that inventory may be costed using the FIFO or weighted average cost formula. He is unsure of which one to use and asks for your assistance. In discussions with Astro, you learn the following.
1. | Suppliers to Ayayai Products provide goods at regular prices as long as Ayayai Products current ratio is at least 2 to 1. If this ratio is lower, the suppliers increase their price by 10% in order to compensate for what they consider to be a substantial credit risk. | |
2. | The terms of the long-term bank loan include the banks ability to demand immediate repayment of the loan if the debt to total assets ratio is greater than 45%. | |
3. | Astro thinks that, for the company to be a success, the rate of return on total assets should be at least 30%. | |
4. | Astro has an agreement with the companys only employee that, for each full percentage point above a 25% rate of return on total assets, she will be given an additional one day off with pay in the following year. |
Prepare an income statement and a year-end SFP, assuming the company applies: (1) the FIFO cost formula and (2) the weighted average cost formula.
ecalculate the key ratios given each formula in (a). (Round current ratio answers to 2 decimal places, e.g. 52.75 and all other answers to 1 decimal place, e.g. 7.5%)
FIFO | Weighted average | |||
Current ratio | : 1 | : 1 | ||
Debt to total assets ratio | % | % | ||
Rate of return on total assets | % | % |
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