Problems 9-14 Determining LIFO amountscomprehensive (LO9-5, LO9-6, LO9-7)

Sirotka Retail Company began doing business in 2015. The following information pertains to its first three years of operation: Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

			Purchases					Sales
Year	Operating Expenses		Units			Unit Cost			Units			Unit Price
2015	$	60,000		15,000		$	20.00			12,000		$	35
2016		90,000		20,000			25.00			18,000			40
2017		65,000		5,000			30.00			10,000			40

Assume the following:

The income tax rate is 40%.

Purchase and sale prices change only at the beginning of the year.

Sirotka uses the LIFO cost flow assumption.

Operating expenses are primarily selling and administrative expenses.

Required:

Compute cost of goods sold and the cost of ending inventory for each of the three years.

Prepare income statements for each of the three years.

Compute the LIFO reserve at the end of 2015, 2016, and 2017.

Compute the effect of LIFO liquidation on the net income of the company for the years 2016 and 2017.

Compute the inventory turnover ratio for the years 2016 and 2017. Do not make adjustments for any potential biases in LIFO accounting.

How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the information available in a LIFO financial statement? Illustrate your approach by recomputing Sirotkas inventory turnover ratios for 2016 and 2017.

Compute the gross margin percentages for the years 2016 and 2017.

Provide an estimate of the FIFO cost of goods sold for the years 2015, 2016, and 2017 using the information available in the financial statements.

Based on your answers to requirements 1 and 8, estimate Sirotkas tax savings for 2015, 2016, and 2017.

Assuming a discount rate of 10%, compute the January 1, 2015, present value of the tax savings over the period 20152017 (that is, discount the 2015 tax savings one period, and so on).