FIFO versus LIFO: Ratio Analysis

Presented below are the financial statements of two companies that are identical in every respect except the method of valuing their inventories. The method of valuing inventory is LIFO for the LIFO Company and FIFO for the FIFO Company.

Required
Using the two sets of financial statements, calculate the ratios below for each firm. Ignore the effect of taxes (i.e., assume zero taxes for both firms).

Round all answers to nearest one decimal place, except for 10. Earnings per share (example for percentage ratios: 0.2345 = 23.5%).
Round Earnings per share two decimal places.

Presented below are the financial statements of two companies that are identical in every respect except the method of valuing their inventories. The method of valuing inventory is LIFO for the LIFO Company and FIFO for the FIFO Company.

On January 1, 2011, Garner issued 10-year $200,000 face value, 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Garner $2, par value, ordinary shares. Interest on the bonds is paid annually on December 31. The market rate for Garner’s non-convertible debt is 9%. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2012. (Ignore all tax effects.)Accounting(a) Prepare the journal entry Garner would have made on January 1, 2011, to record the issuance of the bonds and prepare an amortization table for the first three years of the bonds.(b) Garner’s net income in 2012 was $30,000 and was $27,000 in 2011. Compute basic and diluted earnings per share for Garner for 2012 and 2011.(c) Assume that all of the holders of Garner’s convertible bonds convert their bonds to shares on January 2, 2013, when Garner’s shares are trading at $32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion, using the book value method.AnalysisShow how Garner Company will report income and EPS for 2012 and 2011. Briefly discuss the importance of IFRS for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.PrinciplesIn order to converge U.S. GAAP and IFRS, U.S. standard-setters (the FASB) are considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under U.S. GAAP. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that U.S. GAAP potentially sacrifices? What does U.S. GAAP for convertible debt accomplish that IFRS potentially sacrifices?

A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing rates are set. Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain what the material loading charge covers and how it is expressed.

On January 1, 2017, Buffalo Company purchased  12% bonds, having a maturity value of $ 304,000, for $ 327,047.70. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Buffalo Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

(Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal X Proposal Y Proposal Z Initial investment $52,000 $52,000 $52,000 Cash flow from operations Year 1 50,000 26,000 52,000 Year 2 2,000 26,000 Year 3 27,000 27,000 Disinvestment 0 0 0 Life (years) 3 years 3 years 1 year (a) Select the best investment proposal using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 10 percent. Round accounting rate of return four decimal places. Round net present value to the nearest whole number. Use negative signs with your answers, when appropriate. Proposal X Proposal Y Proposal Z Best proposal Payback period (years) Answer 2 Answer 2 Answer 1 Answer Accounting rate of return Answer 0.173 Answer 0.5065 Answer 0.1 Answer Net present value Answer 15,393 Answer 13,409 Answer (4,732) Answer (b) Factors explaining the differences in rankings include all of the following except: The net present value method considers the cost of capital while the payback method does not discount future cash flows. Net present value considers the timing of cash flows while payback considers only total cash flows. While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. The accounting rate of return considers profitability while payback only considers the time required to recover the investment. Mark 1.00 out of 1.00

On January 1, 2017, Brussels enterprises issue bonds at par dated January 1, 2017, that have $3,300,000 par value, mature in 4 years and pay 10% interest semiannually on June 30 and December 31

1) Record the entry for the issuance of bonds for cash on January wa1, 2017

2) record the entry for the first semiannual interest payment on June 30, 2017

3) Record the entry for the second semiannual interest payment on December 31, 2017

4) record the entry for the maturity of the bonds on december 31, 2020.

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 4,000 sets per year. Annual cost data at full capacity follow: Direct labor $ 90,000 Advertising $ 99,000 Factory supervision $ 74,000 Property taxes, factory building $ 20,000 Sales commissions $ 55,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 3,000 Lease cost, factory equipment $ 14,000 Indirect materials, factory $ 20,000 Depreciation, factory building $ 101,000 Administrative office supplies (billing) $ 4,000 Administrative office salaries $ 112,000 Direct materials used (wood, bolts, etc.) $ 426,000 Utilities, factory $ 43,000 Required: 1. Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) 2. Compute the average product cost of one patio set. 3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?

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Is ABC info always better than Average-cost? No… not always. ABC costing will surely be more detailed and most likely more accurate, however will an organization's benefits of ABC outweigh the added intricate, time consuming costly characteristics?

One factor to consider in this would be the amount of overhead costs an organization tends to operate with. ABC should be used "when overhead is high, because small changes in each product cost can make a large difference overall." A company who produces one single product would likely have low overhead as most of the costs would be direct costs associated with the single product. In this situation, ABC benefits would not outweigh the costs and time required to produce ABC information.

“While ABC isn't allowed for external financial reporting, companies may find it useful to enact an ABC system to more effectively analyze cost data.” Since ABC does not conform to GAAP for external reporting requirements, a company essentially has to report on costs twice. It’s important for organizations to consider the added time and cost of now reporting two different ways.

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer for an average cost of $1,496 per unit and then sells them to retail customers for an average price of $2,300 each. The company’s selling and administrative costs for a typical month are presented below: Costs Cost Formula Selling: Advertising $ 956 per month Sales salaries and commissions $ 4,828 per month, plus 3% of sales Delivery of pianos to customers $ 59 per piano sold Utilities $ 640 per month Depreciation of sales facilities $ 5,046 per month Administrative: Executive salaries $ 13,522 per month Insurance $ 697 per month Clerical $ 2,549 per month, plus $41 per piano sold Depreciation of office equipment $ 937 per month During August, Marwick’s Pianos, Inc., sold and delivered 64 pianos. Required: 1. Prepare a traditional format income statement for August. 2. Prepare a contribution format income statement for August. Show costs and revenues on both a total and a per unit basis down through contribution margin.

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31: Amount Sales $ 1,360,000 Selling price per pair of skis $ 400 Variable selling expense per pair of skis $ 46 Variable administrative expense per pair of skis $ 19 Total fixed selling expense $ 135,000 Total fixed administrative expense $ 125,000 Beginning merchandise inventory $ 75,000 Ending merchandise inventory $ 115,000 Merchandise purchases $ 285,000 Required: 1. Prepare a traditional income statement for the quarter ended March 31. 2. Prepare a contribution format income statement for the quarter ended March 31. 3. What was the contribution margin per unit?

​Don’t Cry Over Spilled​ Milk, Inc., a manufacturer of​ mops, uses the weighted average method in its processing costing system. The company uses a departmental costing system to allocate manufacturing overhead​ (MOH) to production. Production in the​ company's first processing​ department, Machining, is highly automated. As​such, machine hours are used as the allocation base in the department.

At the beginning of the​ year, the company estimated that its total MOH would be​ $400,000; 87.5% of which was expected to be generated in the Machining department. The Machining department was expected to log​ 100,000 machine hours during the year. The following data related to the operations in Machining during June​ 2018:

During​ June, 8,500 actual machine hours were logged during production.

​(round all calculation to 2 decimal places. round final answers to the nearest

dollar.​)

The cost to assemble one mop in June was

A.​$19.87       

B.​$13.77

C.​$19.67

Natalie’s friend, Curtis Lesperance, decides to meet with Natalie after hearing that her discussions about a possible business partnership with her friend Katy Peterson have failed. (Natalie had decided that forming a partnership with Katy, a high school friend, would hurt their friendship. Natalie had also concluded that she and Katy were not compatible to operate a business venture together.) Because Natalie has been so successful with Continuing Cookie Chronicle and Curtis has been just as successful with his coffee shop, they both conclude that they could benefit from each other’s business expertise. Curtis and Natalie next evaluate the different types of business organization. Because of the advantage of limited personal liability, they decide to form a corporation. Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Natalie’s business consists of giving cookie-making classes and selling fine European mixers. The plan is for Natalie to use the premises Curtis currently rents to give her cooking-making classes and demonstrations of the mixers that she sells. Natalie will also hire, train, and supervise staff to bake the cookies and muffins sold in the coffee shop. By offering her classes on the premises, Natalie will save on travel time going from one place to another. Another advantage is that the coffee shop will have one central location for selling the mixers. The current market values of the assets of both businesses are as follows. Curtis’s Coffee Continuing Cookie Chronicle Cash $7,130 $12,000 Accounts receivable 100 800 Inventory 450 1,200 Equipment 2,500 1,000 * *Cookie Chronicle decided not to buy the delivery van considered in Chapter 10. Combining forces will also allow Natalie and Curtis to pool their resources and buy a few more assets to run their new business venture. Curtis and Natalie then meet with a lawyer and form a corporation on November 1, 2020, called Cookie & Coffee Creations Inc. The articles of incorporation state that there will be two classes of shares that the corporation is authorized to issue: common shares and preferred shares. They authorize 100,000 no-par shares of common stock, and 10,000 no-par shares of preferred stock with a $0.50 noncumulative dividend. The assets held by each of their sole proprietorships will be transferred into the corporation at current market value. Curtis will receive 10,180 common shares, and Natalie will receive 15,000 common shares in the corporation. Therefore, the shares have a fair value of $1 per share. Natalie and Curtis are very excited about this new business venture. They come to you with the following questions: Prepare the journal entries required on November 1, 2020, the date when Natalie and Curtis transfer the assets of their respective businesses into Cookie & Coffee Creations Inc.

Assume that Cookie & Coffee Creations Inc. issues 1,000 $0.50 noncumulative preferred shares to Curtis’s dad and the same number to Natalie’s grandmother, in both cases for $5,000. Also assume that Cookie & Coffee Creations Inc. issues 750 common shares to its lawyer.

Prepare the journal entries for each of these transactions. They all occurred on November 1. Prepare the opening balance sheet for Cookie & Coffee Creations Inc. as of November 1, 2020, including the journal entries in (b) and (c) above.

Accounts Receivable
Cash
Common Stock
Equipment
Income Summary
Inventory
Land
Organization Expense
Paid-in Capital from Treasury Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital in Excess of Par-Preferred Stock
Paid-in Capital in Excess of Stated Value-Common Stock
Patents
Preferred Stock
Retained Earnings
Share Capital-Ordinary
Share Capital-Preference
Share Premium-Ordinary
Share Premium-Preference
Treasury Stock

Under the United States Generally Accepted Accounting Standards (U.S. GAAP), property, plant and Equipment are reported at historical cost net of accumulated depreciation. These assets are written down to fair value when it is determined that they have been impaired.

Several other countries, including Australia, Brazil,England, Mexico and Singapore, permit the revaluation of property, plant and equipment to their current cost as of the balance sheet date. The primary argument in favor of revaluation is that the historical cost of assets purchased ten, twenty, or more years ago is not meaningful. A primary argument against revaluation is the lack of objectivity in arriving at current cost estimates,particularly for old assets that either will or cannot be replaced with similar assets or for which there are no comparable or similar assets currently available for purchase.

Required:1) List and discuss the 5 qualitative concept of comparability. In your opinion, would the financial statements of companies operating in one of the foreign countries listed above be comparable to a U. S. company’s financial statements? Explain.

UCC Revised Article 3 covers negotiable instruments within the US. What problems hinder any efforts to establish uniform international rules for negotiable instruments? What additional variables do you see in trying to establish a uniform international set of rules for negotiable instruments compared to doing so solely within the United States?

Like the folk song from the 1960's, "The times they are a changin'." UCC revised Article 3 and the law of negotiable instruments were designed to create a substitute for cash and to facilitate commerce. Has the importance of negotiable instruments in commerce increased or decreased in recent years? How will increased online commerce affect the importance of negotiable instruments?