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 1.4 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	$	22
Inventory		(a	)
Other (noncurrent) assets		131
Total assets	$	(b	)
Current liabilities	$	60
Other (noncurrent) liabilities		68
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 5 units of inventory at a unit cost of $12, then purchased 8 units at a cost of $13 each, and finally purchased 6 units at a cost of $17 each. A year-end inventory count determined that 4 units are on hand.

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

Inventory Total Assets Total Liabilities and Stockholders' Equity Stockholders' Equity

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

Inventory Total Assets Total Liabilities and Stockholders' Equity Stockholders' Equity

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

FIFO Weighted Average LIFO

Answer 1