Question

You have been given responsibility for overseeing a bank’s small business loans division. The bank has included loan covenants requiring a minimum current ratio of 1.2 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 company’s inventory costing method is important, you present the following balance sheet information.

Current assets other than inventory	$	25
Inventory		(a	)
Other (noncurrent) assets		143
Total assets	$	(b	)
Current liabilities	$	45
Other (noncurrent) liabilities		50
Stockholders’ equity		(d	)
Total liabilities and stockholders’ equity	$	(c	)

You ask the former loans manager to find amounts for (a), (b), (c), and (d) assuming the company began the year with 3 units of inventory at a unit cost of $10, then purchased 6 units at a cost of $11 each, and finally purchased 4 units at a cost of $15 each. A year-end inventory count determined that 2 units are on hand.

Required:

1.	Determine the amount for (a) using FIFO, and then calculate (b) through (d).

	Amount
Inventory
Total Assets
Total Liabilities and Stockholder Equity
Stockholders Equity

2.	Determine the amount for (a) using Weighted Average, and then calculate (b) through (d).

	Amount
Inventory
Total Assets
Total Liabilities and Stockholder Equity
Stockholders Equity

3.	Determine the amount for (a) using LIFO, and then calculate (b) through (d).

	Amount
Inventory
Total Assets
Total Liabilities and Stockholder Equity
Stockholders Equity

4.	Determine the current ratios using (i) FIFO, (ii) Weighted Average, and (iii) LIFO. (Round your answers to 2 decimal places.)

	Current Ratio
FIFO
Weighted Average
LIFO

5.	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.

	Current Ratio
FIFO
Weighted Average
LIFO

Answer 1