Question

Problem H Cooper Company currently uses the FIFO method to account for its inventory but is considering a switch to LIFO before the books are closed for the year. Selected data for the year are:

Merchandise inventory, January 1	$1,430,000
Current assets	3,603,600
Total assets (operating)	5,720,000
Cost of goods sold (FIFO)	2,230,800
Merchandise inventory, December 31 (LIFO)	1,544,400
Merchandise inventory, December 31 (FIFO)	1,887,600
Current liabilities	1,144,000
Net sales	3,832,400
Operating expenses	915,200

1. Compute the current ratio, inventory turnover ratio, and rate of return on operating assets assuming the company continues using FIFO.

2. Repeat part (a) assuming the company adjusts its accounts to the LIFO inventory method.

Answer 1

Current ratio	Current assets / Current liabilities	3.15
Inventory turnover ratio	cost of goods sold/ average inventory
Average inventory	(Opening + closing)/2
	1658800
	1.344827586
Rate of return on operating assets	Net income/ total operating assets
Net income	Net sales- operating expenses
	2,917,200
	0.51

Ratios under LIFO
Current ratio	Current assets / Current liabilities
Current asset	3,603,600
(Less) closing inventory under FIFO	1,887,600
Add Closing inventory under LIFO	1,544,400
Revised current asset	3,260,400
Current ratio	2.85
Inventory turnover ratio	cost of goods sold/ average inventory
Average inventory	(Opening + closing)/2
	1487200
	1.5