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 1.3 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	$	32
Inventory		(a	)
Other (noncurrent) assets		147
Total assets	$	(b	)
Current liabilities	$	50
Other (noncurrent) liabilities		65
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 $12, then purchased 6 units at a cost of $13 each, and finally purchased 4 units at a cost of $17 each. A year-end inventory count determined that 2 units are on hand. 1a. Determine the amount for (a) using FIFO, and then calculate (b) through (d). Inventory: Total Assets: Total Liabilities and Stockholders' Equity: Stockholders' Equity 1b.) Determine the amount for (a) using weighted averages, and then calculate (b) through (c) Inventory: Total Assets: Total Liabilities and Stockholders' Equity: Stockholders' Equity

Answer 1

Solution 1a:

Under FIFO ending inventory will consist from final purchase quantity of 4 units.

Therefore value of ending inventory = 2* $17 = $34

Total Assets (b) = Current assets + Inventory + Other assets = $32 + $34 + $147 = $213

Total liabilities and stockholders’ equity (c) = Total Assets = $213

Stockholders’ equity (d) = Total liabilites and stockholder's Equity - Current liabilities - Other liabilities

= $213 - $50 - $65 = $98

Solution 1b:

Total cost of goods available for sale= (3*$12) +(6*$13) + (4*$17)= $182

Units available for sale = 3+ 6 + 4 = 13

Average cost per unit = $182 / 13 = $14 per unit

Units in ending inventory = 2 units

Value of ending inventory under weighted average cost = 2 * $14 = $28

Total Assets (b) = Current assets + Inventory + Other assets = $32 + $28 + $147 = $207

Total liabilities and stockholders’ equity (c) = Total Assets = $207

Stockholders’ equity (d) = Total liabilites and stockholder's Equity - Current liabilities - Other liabilities

= $207 - $50 - $65 = $92