Lets assume you are analyzing two companies' financial statements in the same industry e.g.; ALX and PBC. Both businesses are organized as corporations and therefore must pay income taxes on their profits. Both companies manage a large amounts of inventories. A note to ALX's financial statement shows that the companys inventory is shown at a cost that is far below the current market value of the inventory while PBC inventory cost which is very close to its current market value.

Answer the following questions and explain the reasoning behind your answers. If we assume that both companies are identical except for the method used in the valuation of inventory:

(a) What method of inventory valuation is probably used by both companies? (b) Which company probably reporting the higher net income in recent years?

(c) Which companys financial statement probably implies the highest inventory turnover rate?

4. (d) Which companys financial statement probably implies the highest current ratio?

5. (e) If both companies sold their entire inventory at the same sales prices, which company

   would you expect to report a larger amount of gross profit?