FOR LECTURE 3 MULTIPLE STEP INCOME STATEMENT AND INVENTORY (WILLIAMS CH6\&8) AND LECTURE 4 REPORTING AND ANALYZING LONG LIVED ASSETS (WILLIAMS CH9) 1. FIFO VS LIFO Ford Motor Company uses FIFO and LIFO to account for different segments of its inventories. A note to the company's most recent financial statements indicated that if FIFO had been used for the entire inventory, the total amount of inventory would have been almost $1 billion higher ( $8.3 million vs. $7.3 billion). a. Indicate whether each of the following financial measurements would have been higher, lower, or unaffected had Ford Motor Company used FIFO for its entire inventory. Explain the reasoning behind your answers. i. Gross profit rate. ii. Reported net income. iii. Current ratio (Current ratio measures a firm's liquidity and it equals Current Assets/Current Liabilities. Ford's current ratio is greater than 1 to 1). iv. Inventory turnover rate (See slides of Lecture 3). v. Accounts receivable turnover rate (See slides of Lecture 3 ). vi. Cash payments made to suppliers. vii. Net cash flow from operations (Ford's operating cash flows are positive). b. Provide your own assessment of whether using LIFO has made Ford Motor Company more or less (1) liquid and (2) well-off. Defend your answers. 2. DEPRECIATION METHODS (UNITS-OF-OUTPUT) During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $14,000 per car. The cars will be sold to a wholesaler at an estimated $5,000 each as soon as they have been driven 50,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage. a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven. b. Assuming that the 60 rental cars are driven a total of 1,570,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year. c. In this particular situation, do you believe the units-of-output depreciation method achieves a better matching of expenses with revenue than would the straight-line method? Explain. FOR LECTURE 3 MULTIPLE STEP INCOME STATEMENT AND INVENTORY (WILLIAMS CH6\&8) AND LECTURE 4 REPORTING AND ANALYZING LONG LIVED ASSETS (WILLIAMS CH9) 1. FIFO VS LIFO Ford Motor Company uses FIFO and LIFO to account for different segments of its inventories. A note to the company's most recent financial statements indicated that if FIFO had been used for the entire inventory, the total amount of inventory would have been almost $1 billion higher ( $8.3 million vs. $7.3 billion). a. Indicate whether each of the following financial measurements would have been higher, lower, or unaffected had Ford Motor Company used FIFO for its entire inventory. Explain the reasoning behind your answers. i. Gross profit rate. ii. Reported net income. iii. Current ratio (Current ratio measures a firm's liquidity and it equals Current Assets/Current Liabilities. Ford's current ratio is greater than 1 to 1). iv. Inventory turnover rate (See slides of Lecture 3). v. Accounts receivable turnover rate (See slides of Lecture 3 ). vi. Cash payments made to suppliers. vii. Net cash flow from operations (Ford's operating cash flows are positive). b. Provide your own assessment of whether using LIFO has made Ford Motor Company more or less (1) liquid and (2) well-off. Defend your answers. 2. DEPRECIATION METHODS (UNITS-OF-OUTPUT) During the current year, Central Auto Rentals purchased 60 new automobiles at a cost of $14,000 per car. The cars will be sold to a wholesaler at an estimated $5,000 each as soon as they have been driven 50,000 miles. Central Auto Rentals computes depreciation expense on its automobiles by the units-of-output method, based on mileage. a. Compute the amount of depreciation to be recognized for each mile that a rental automobile is driven. b. Assuming that the 60 rental cars are driven a total of 1,570,000 miles during the current year, compute the total amount of depreciation expense that Central Auto Rentals should recognize on this fleet of cars for the year. c. In this particular situation, do you believe the units-of-output depreciation method achieves a better matching of expenses with revenue than would the straight-line method? Explain
