Question
You have been given responsibility for overseeing a banks small business loans division. The bank has included loan covenants requiring a minimum current ratio of
You have been given responsibility for overseeing a banks small business loans division. The bank has included loan covenants requiring a minimum current ratio of 1.2 in all small business loans. When you ask which inventory costing method the covenant assumes, the previous loans manager gives you a blank look. To explain to him that a companys inventory costing method is important, you present the following balance sheet information. |
Current assets other than inventory | $ | 25 | |
Inventory | (a | ) | |
Other (noncurrent) assets | 143 | ||
Total assets | $ | (b | ) |
Current liabilities | $ | 45 | |
Other (noncurrent) liabilities | 50 | ||
Stockholders equity | (d | ) | |
Total liabilities and stockholders equity | $ | (c | ) |
You ask the former loans manager to find amounts for (a), (b), (c), and (d) assuming the company began the year with 3 units of inventory at a unit cost of $10, then purchased 6 units at a cost of $11 each, and finally purchased 4 units at a cost of $15 each. A year-end inventory count determined that 2 units are on hand. |
Required: |
1. | Determine the amount for (a) using FIFO, and then calculate (b) through (d). |
Amount | |
Inventory | |
Total Assets | |
Total Liabilities and Stockholder Equity | |
Stockholders Equity |
2. | Determine the amount for (a) using Weighted Average, and then calculate (b) through (d). |
Amount | |
Inventory | |
Total Assets | |
Total Liabilities and Stockholder Equity | |
Stockholders Equity |
3. | Determine the amount for (a) using LIFO, and then calculate (b) through (d). |
Amount | |
Inventory | |
Total Assets | |
Total Liabilities and Stockholder Equity | |
Stockholders Equity |
4. | Determine the current ratios using (i) FIFO, (ii) Weighted Average, and (iii) LIFO. (Round your answers to 2 decimal places.) |
Current Ratio | |
FIFO | |
Weighted Average | |
LIFO |
5. | Determine whether the company would be in violation or compliance with the loan covenant if the company were to use (i) FIFO, (ii) Weighted Average, and (iii) LIFO. |
Current Ratio | |
FIFO | |
Weighted Average | |
LIFO |
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