Question

1-What does it mean if a company has a lack of working capital? How is working capital calculated? Describe in at least 3 sentences

2-All other things being equal, the higher a company’s net margin, the better its performance. This statement is

A. True

B. False

And fully describe your answer with at least 3 sentences.

3-How does the selection of an inventory costing system affect the financial statements? Specifically consider FIFO, LIFO, and weighted average

4-How does the selection of a depreciation method affect the financial statements? Specifically, consider straight line and accelerated methods. Describe in at least 3 sentences.

Answer 1

1)

Working capital is required to pay day to day expenses or operating expenses of business. Working capital can be calculated by Current Asset less Current liabilities. If company has low working capital it means its current assets are less than its current liabilities. In this situation, a company is likely to have difficulty paying back its creditors.

2)

Given statement is true. all other things being equal, the higher a company’s net margin, the better its performance. Higher net margin is required by the investor who has invested their money in business. It is proprietor in case of proprietorship business, partner in case of partnership busuiness and shareholders in case of company. Higher net margin makes easy for the company to procure more capital from the financial market in the form of issuing shares, debentures or bonds.

3)

FIFO Method: FIFO method is generally preferred in case of deflationary environment not in an inflationary environment. FIFO method refers to First in first out where goods which are firstly acquired are sold or transferred first. So, in case of deflationary environment where cost are continuously decreasing, high value of inventory will be sold first and hence it will increase overall cost of goods sold and subsequently it will decrease net income and ending inventory.

LIFO Method:  LIFO method is generally preferred in case of  inflationary environment not in an deflationary environment. LIFO method refers to Last in first out where goods which are lastly acquired are sold or transferred first. So, in case of inflationary environment where cost are continuously increasing, high value of inventory will be sold first and hence it will increase overall cost of goods sold and subsequently it will decrease net income and ending inventory.

Weighted Average Methods: The weighted-average costs are directly proportional to the purchase costs. Therefore, in a rising price environment, the average unit costs are higher and net income is lower, while the opposite is true in a falling price environment.

4)

Depreciation is an expense which is debited to profit and loss statement for decrease in the value of asset. The value of assets are decreased due to wear and tear, usage ,obsolescence etc. Selection of depreciation method affects the financial statement in a severe manner. In case of straight line method, fixed amount of depreciation is charged and in case of accerelated method, amount of depreciation increased every year and consequently it will lower net income every year. So, selection of depreciation method have an effect on the net income of firm because it is charge against net profit.