Question

In preparation for significant expansion of its international operations, Ayayai Co. has adopted a plan to gradually shift to the same accounting methods as used by its international competitors. Part of this plan includes a switch from LIFO inventory accounting to FIFO (recall that IFRS does not allow LIFO). Ayayai decides to make the switch to FIFO at January 1, 2020. The following data pertains to Ayayai’s 2020 financial statements (in millions of dollars). Sales $490 Inventory purchases 290 12/31/20 inventory (using FIFO) 520 Compensation expense 11 All sales and purchases were with cash. All of 2020’s compensation expense was paid with cash. (Ignore taxes.) Ayayai’s property, plant, and equipment cost $340 million and has an estimated useful life of 10 years with no salvage value. Ayayai Co. reported the following for fiscal 2019 (in millions of dollars): AYAYAI CO. BALANCE SHEET AT DECEMBER 31, 2019 2019 2018 2019 2018 Cash $ 311 $ 140 Common stock $ 440 $ 440 Inventory 440 420 Retained earnings 583 426 Property, plant, and equipment 340 340 Accumulated depreciation (68 ) (34 ) Total assets $ 1,023 $ 866 Total equity $ 1,023 $ 866 AYAYAI CO. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2019 2019 Sales $ 440 Cost of goods sold (240 ) Depreciation expense (34 ) Compensation expense (9 ) Net income $ 157 Summary of Significant Accounting Policies Inventory: The company accounts for inventory by the LIFO method. The current cost of the company’s inventory, which approximates FIFO, was $54 and $44 higher at the end of fiscal 2019 and 2018, respectively, than those reported in the balance sheet.

Prepare Ayayai’s December 31, 2020, balance sheet and an income statement for the year ended December 31, 2020. In columns beside 2020’s numbers, include 2019’s numbers as they would appear in the 2020 financial statements for comparative purposes. (List Assets in order of liquidity.) AYAYAI CO. Balance Sheet December 31, 2020For the Year Ended December 31, 2020For the Quarter Ended December 31, 2020 2020 2019 $ $ Long-Term InvestmentsTotal AssetsTotal Current AssetsCurrent AssetsTotal Intangible AssetsCurrent LiabilitiesTotal EquityTotal Current LiabilitiesShort-Term InvestmentsIntangible Assets $ $ $ Short-Term InvestmentsTotal Current LiabilitiesIntangible AssetsTotal EquityTotal Intangible AssetsLong-Term InvestmentsTotal AssetsCurrent AssetsCurrent LiabilitiesTotal Current Assets $ $ AYAYAI CO. Income Statement December 31, 2020For the Year Ended December 31, 2020For the Quarter Ended December 31, 2020 2020 2019 $ $ Total ExpensesExpensesRevenuesNet Income / (Loss)Total RevenuesDividends $ $

Compute Ayayai’s inventory turnover for 2019 and 2020 under both LIFO and FIFO. Assume averages are equal to year-end balances where necessary. (Round answers to 2 decimal places, e.g. 52.75. Do not leave any field blank. Enter 0 for the amounts if the answer is N/A.) 2020 2019 LIFO FIFO

Answer 1

Under FIFO Method
Inventory turnover ratio		Amount in $ (2020)	Amount in $ (2019)
Sales		490	440
Average inventory assumed to be year end balances		520	538
Inventory turnover ratio		0.94	0.82

Notes-

1.For calculating change in inventory due to change in method, inventory should be increased and retained earnings should be credited. so $98 is added to the inventory while retained earnings is credited.

2019 inventory is changed due to change in method and 58 & 48 is added to clsoing inventory balance, so new inventory balance is 54+44+440=538

2.Inventory turnover ratio is calculated as below-

Inventory/Average inventory

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