Q 3. After analyzing financial statements of two companies of same industry: Shafer company and Margo

company. Both are paying income taxes on their earnings, both have large inventories and

replacement cost of their product that are on the rise, over the years. A note to financial statements

disclosed that Shafer company is cost is shown far below to its replacement cost and Margo

inventory is shown at a cost close its current replacement cost.

Required: Answer the following questions and explain the reasoning behind your answer.

a. What method of inventory valuation is probably used by Shafer and Margo?

b. Which company probably has been reporting the higher net income, support with figures?

c. If both companies sold their entire inventory at the same sales price, which company would you

expect to report the larger amount of gross profit, support with figures proving facts?