Question

The following comparative information is available for Cullumber Company for 2022.

LIFO FIFO

Sales revenue $88,000 $88,000

Cost of goods sold 38,000 34,200

Operating expenses (including depreciation) 29,000 29,000

Depreciation 9,000 9,000

Cash paid for inventory purchases 19,070 19,070

Determine net income under each approach. Assume a 30% tax rate.

Determine net cash provided by operating activities under each approach. Assume that all sales were on a cash basis and that income taxes and operating expenses, other than depreciation, were on a cash basis.

Calculate the quality of earnings ratio under each approach. (Round answers to 2 decimal places, e.g. 5.15.)

Answer 1

	LIFO	FIFO
Sales revenue	88000	88000
Cost of goods sold	38000	34200
Gross margin	50000	53800
Operating expenses	29000	29000
Income before taxes	21000	24800
Income tax expense	6300	7440
Net income	14700	17360

	LIFO	FIFO
Cash flows from Operating Activities:
Cash receipts from customers	88000	88000
Cash paid for inventory purchases	-19070	-19070
Cash paid for operating expenses	-20000	-20000
Cash paid for income taxes	-6300	-7440
Net cash provided by operating activities	42630	41490

Quality of earnings ratio = Net cash from operating activities/Net income

	LIFO	FIFO
Net cash from operating activities	42630	41490
Net income	14700	17360
Quality of earnings ratio	2.90	2.39