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FSA-Tutorial 4 Analyzing Investing Activities Part 1

The document discusses analyzing investing activities through analyzing accounts receivable, comparing inventory costing methods like LIFO and FIFO, determining inventory cost flow assumptions, and calculating financial ratios under different inventory methods for a retailer dealing in a single product.

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KHOO TAT SHERN DEXTON
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58 views2 pages

FSA-Tutorial 4 Analyzing Investing Activities Part 1

The document discusses analyzing investing activities through analyzing accounts receivable, comparing inventory costing methods like LIFO and FIFO, determining inventory cost flow assumptions, and calculating financial ratios under different inventory methods for a retailer dealing in a single product.

Uploaded by

KHOO TAT SHERN DEXTON
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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BBMF3063 Financial Statement Analysis

Tutorial 4 – Analyzing Investing Activities

1. a. Identify the main concerns in analysis of accounts receivable.

b. Describe information, other than that usually available in financial statements, that we
should collect to assess the risk of non collectibility of receivables.

2. Compare and contrast the effects of LIFO and FIFO inventory costing methods on earnings in
an inflationary period. Provide Illustration.

3. Cost for inventory purposes should be determined by the inventory cost flow method best
reflecting periodic income.

Required:
a. Describe the inventory cost flow assumptions of (1) average-cost, (2) FIFO, and (3) LIFO.
b. Discuss management’s usual reasons for using LIFO in an inflationary economy.
c. When there is evidence the value of inventory, through its disposal in the ordinary course
of business is less than cost, what is the accounting treatment? What concept justifies this
treatment?

4. Droog Co. is a retailer dealing in a single product. Beginning inventory at January 1 of this
year is zero and operating expenses for this same year are $5,000. The following purchases
are made this year:

Ending inventory at December 31 is 800 units. End-of-year assets, excluding inventories,


amount to $75,000, of which $50,000 of the $75,000 are current. Current liabilities amount to
$25,000, and long-term liabilities equal $10,000.

1
BBMF3063 Financial Statement Analysis

Tutorial 4 – Analyzing Investing Activities

Required:

a. Determine net income for this year under each of the following inventory methods. Assume a
sales price of $25 per unit and ignore income taxes.
(1) FIFO
(2) LIFO
(3) Average cost

b. Compute the following ratios under each of the inventory methods of FIFO, LIFO, and
average cost.
(1) Current ratio
(2) Inventory turnover
(3) Gross margin as a percent of sales
(4) Net profit as a percent of sales
(5) Debt to equity ratio

c. Discuss the effects of inventory accounting methods for financial statement analysis given the
results from parts a. and b.

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