1. Based on the information on the next page, what inventory costing method does CarMax use? Do you believe this method is appropriate? Explain.
2. b. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?
3. c. At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute the inventory turnover for both years. Interpret the ratio.
4. d. CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017 and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.

Please answer E and F (Part A-D posted here https://www.chegg.com/homework-help/questions-and-answers/based-information-next-page-inventory-costing-method-carmax-use-believe-method-appropriate-q60033409)

e. What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

f. (This question does not pertain to CarMax) In general, discuss how companies can use the lower of cost or market (LCM) rule to manage earnings? Please research and find two companies that have recently written-down their inventory as a result of the LCM rule. Provide details of the inventory write-down.

The asset side of the 2017 balance sheet for CarMax Inc. is below. Consolidated Balance Sheets - Feb. 28, 2017 Feb. 29, 2016 USD $ in Thousands (excerpts) CURRENT ASSETS: Cash and cash equivalents 38,416 $ 37,394 Restricted cash from collections on auto loan receivables 380,353 343,829 Accounts receivable, net 152,388 132,171 Inventory 2,260,563 1,932,029 Other current assets 41,910 26,358 TOTAL CURRENT ASSETS 2,873,630 2,471,781 Auto loan receivables, net 10,596,076 9,536,892 Property and equipment, net 2,518,393 2,161,698 Deferred income taxes 150,962 161,862 Other assets 140,295 127,678 TOTAL ASSETS $16,279,356 $14,459,911 Answera. More commonly, Inventory is the largest assets asset in the current asset division of any company. Based on the given information, it can be said that CarMax uses FIFO Method as an inventory costing method. It is so because as we interpret the Asset side of the Balance Sheet, the Total Assets have increased in comparison to the previous year and also, the Inventory shows a higher or more accurate value. FIFO Method is one inventory valuation method which assumes that the assets values are higher on the Balance Sheet. Every Inventory Valuation Method has its pros and cons. The optimal method of all the methods is always considered to be FIFO since it utilizes the oldest inventory first in the production of goods or services which indicates that valuation of COGS reflects the actual production schedule. However, every enterprise must stick to one inventory valuation method to vitalize its financial results. Answerb. Common-Size Inventory (for Feb 29, 2016) = Inventory - Total Assets = ($ 1,932,029 = $ 14,459,911) x 100 = 13.361% Common-Size Inventory (for Feb 28, 2017) = Inventory = Total Assets = ($ 2,260,563 = $ 16,279,356) x 100 = 13.886% Comment: The Inventory in comparison to previous year indicates a very slightly upward change. As the company is an automotive retailer, this is not a good signal. It is so because having a higher inventory indicates that the stocks or goods and services has not been sold and converted into cash flows in the Income Statement and is lying idle as current assets. In other words, it indicates that there has been a decline in the sales for the company but still the company is having strong position of its current assets. Answer c. Inventory Turnover Ratio (for Feb 29, 2016) = Average Days Inventory Outstanding = Inventory Turnover = 365 = (13,130,915 = {(2,086,874 + 1,932,029) = 2} = 365 = (13,130,915 = 2,009,451.50) = 365 = 6.534576724 = 55.85671657 Inventory Turnover Ratio (for Feb 28, 2017) Average Days Inventory Outstanding - Inventory Turnover = 365 = (13,691,824, = {(2,260,563 +1,932,029) = 2} = 365 = (13,130,915 = 2,096,296) = 365 = 6.263864931 = 58.27073285 Interpretation: The Inventory Turnover Ratio indicates that there has been weak sales or lower sales in the year 2016 as compared to the year 2017. Answer d. Gross Profit Margin (for Feb 29, 2016) = Sales - Cost of Sales = $ 15,149,675 - $ 13,130,915 = $ 2,018,760 Gross Profit Margin (for Feb 29, 2016) = Sales - Cost of Sales = $ 15,875,118 - $ 13,691,824 = $ 2, 183,294 The asset side of the 2017 balance sheet for CarMax Inc. is below. Consolidated Balance Sheets - Feb. 28, 2017 Feb. 29, 2016 USD $ in Thousands (excerpts) CURRENT ASSETS: Cash and cash equivalents 38,416 $ 37,394 Restricted cash from collections on auto loan receivables 380,353 343,829 Accounts receivable, net 152,388 132,171 Inventory 2,260,563 1,932,029 Other current assets 41,910 26,358 TOTAL CURRENT ASSETS 2,873,630 2,471,781 Auto loan receivables, net 10,596,076 9,536,892 Property and equipment, net 2,518,393 2,161,698 Deferred income taxes 150,962 161,862 Other assets 140,295 127,678 TOTAL ASSETS $16,279,356 $14,459,911 Answera. More commonly, Inventory is the largest assets asset in the current asset division of any company. Based on the given information, it can be said that CarMax uses FIFO Method as an inventory costing method. It is so because as we interpret the Asset side of the Balance Sheet, the Total Assets have increased in comparison to the previous year and also, the Inventory shows a higher or more accurate value. FIFO Method is one inventory valuation method which assumes that the assets values are higher on the Balance Sheet. Every Inventory Valuation Method has its pros and cons. The optimal method of all the methods is always considered to be FIFO since it utilizes the oldest inventory first in the production of goods or services which indicates that valuation of COGS reflects the actual production schedule. However, every enterprise must stick to one inventory valuation method to vitalize its financial results. Answerb. Common-Size Inventory (for Feb 29, 2016) = Inventory - Total Assets = ($ 1,932,029 = $ 14,459,911) x 100 = 13.361% Common-Size Inventory (for Feb 28, 2017) = Inventory = Total Assets = ($ 2,260,563 = $ 16,279,356) x 100 = 13.886% Comment: The Inventory in comparison to previous year indicates a very slightly upward change. As the company is an automotive retailer, this is not a good signal. It is so because having a higher inventory indicates that the stocks or goods and services has not been sold and converted into cash flows in the Income Statement and is lying idle as current assets. In other words, it indicates that there has been a decline in the sales for the company but still the company is having strong position of its current assets. Answer c. Inventory Turnover Ratio (for Feb 29, 2016) = Average Days Inventory Outstanding = Inventory Turnover = 365 = (13,130,915 = {(2,086,874 + 1,932,029) = 2} = 365 = (13,130,915 = 2,009,451.50) = 365 = 6.534576724 = 55.85671657 Inventory Turnover Ratio (for Feb 28, 2017) Average Days Inventory Outstanding - Inventory Turnover = 365 = (13,691,824, = {(2,260,563 +1,932,029) = 2} = 365 = (13,130,915 = 2,096,296) = 365 = 6.263864931 = 58.27073285 Interpretation: The Inventory Turnover Ratio indicates that there has been weak sales or lower sales in the year 2016 as compared to the year 2017. Answer d. Gross Profit Margin (for Feb 29, 2016) = Sales - Cost of Sales = $ 15,149,675 - $ 13,130,915 = $ 2,018,760 Gross Profit Margin (for Feb 29, 2016) = Sales - Cost of Sales = $ 15,875,118 - $ 13,691,824 = $ 2, 183,294