(The effect of different cash flow assumptions on liquidity, LO 2, 7) The balances in the current asset and liability accounts for Feeder Ltd. (Feeder) are provided on page 482. The balances in the inventory account are provided under the FIFO, average cost, and LIFO cost flow assumptions.

Required:

a. Calculate Feeder’s current ratio on December 31, 2005 using the three cost flow assumptions.

b. How do you explain the results you obtained in (a)?

c. What are the implications for analyzing Feeder Ltd’s financial statements of the different results you obtained in (a)?

d. Which current ratio provides the best measure of Feeder’s liquidity? Explain.

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Cost flow assumption Inventory balance on December 31, 2005 FIFO Average cost $89,000 68,000 LIFO 47,000 Account Cash Accounts receivable Prepaid assets Account balance on December 31, 2005 $12,000 25,000 7,000 Bank loan 35,000 Accounts payable and accrued liabilities 60,000