Question
You have been given responsibility for overseeing Well$ Fargos small business loans division (but Im not an FRL Major = ). The bank has included
You have been given responsibility for overseeing Well$ Fargos small business loans division (but Im not an FRL Major = ). The bank has included loan covenants requiring a minimum current ratio of 1.80 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:
You ask the former loans manager to find amounts for (a), (b), (c), and (d) assuming the company began the year with 5 units of inventory at a unit cost of $11, then purchased 8 units at a cost of $12 each, and finally purchased 6 units at a cost of $16 each. A year-end inventory count determined that 4 units are on hand. Required: 1. Determine the amounts Ending Inventory and Cost of Goods Sold using FIFO Method. Show your calculations. 2. Determine the amounts Ending Inventory and Cost of Goods Sold using Weighted Average Method. Show your calculations. 3. Determine the amounts Ending Inventory and Cost of Goods Sold LIFO Method. Show your calculations. 4. Complete the table above using FIFO, Weighted Average & LIFO Methods. Show your calculations. 5. Determine the current ratios, rounded to two decimal places, using (i) FIFO, (ii) Weighted Average, and (iii) LIFO and explain why these ratios differ. Show your calculations. 6. 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.
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