Question

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.

Comparative Balance Sheets	FIFO Company	LIFO Company
Sales	19,750,000	19,750,000
Less: Cost of goods sold	13,000,000	13,840,000
Gross profit	6,750,000	5,910,000
Less: Operating expenses	5,000,000	5,000,000
Net income before tax	1,750,000	910,000

Comparative Balance Sheets	FIFO Company	LIFO Company
Assets
Cash	600,000	600,000
Receivables	1,200,000	1,200,000
Inventory	4,750,000	3,910,000
Total current assets	6,550,000	5,710,000
Total noncurrent (net)	4,000,000	4,000,000
Total	10,550,000	9,710,000
Liabilities and Equities
Current liabilities	1,840,000	1,840,000
liabilities	1,800,000	1,800,000
liabilities	3,640,000	3,640,000
Total shareholders’ equity	6,910,000	6,070,000
Total	10,550,000	9,710,000

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.

			FIFO Company		LIFO Company
1.	Current Ratio
2.	Inventory Turnover ratio
3.	Inventory-on-hand period
4.	Return on total assets			%		%
5.	Total debt to total assets			%		%
6.	Long-term debt to shareholders’ equity			%		%
7.	Gross margin ratio			%		%
8.	Return on sales			%		%
9.	Return on shareholders’ equity			%		%
10.	Earnings per share (assume 2 million shares outstanding)	$		$

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.

Answer 1

		FIFO Company	FIFO Working	LIFO Company	LIFO Working
1	Current Ratio	3.6	=6550000/1840000	3.1	=5710000/1840000
2	Inventory Turnover ratio	2.7	=13000000/4750000	3.5	=13840000/3910000
3	Inventory-on-hand period	133.4	=4750000*365/13000000	103.1	=3910000*365/13840000
4	Return on total assets	16.6%	=1750000/10550000	9.4%	=910000/9710000
5	Total debt to total assets	34.5%	=3640000/10550000	37.5%	=3640000/9710000
6	Long-term debt to shareholders’ equity	26.0%	=1800000/6910000	29.7%	=1800000/6070000
7	Gross margin ratio	34.2%	=6750000/19750000	29.9%	=5910000/19750000
8	Return on sales	8.9%	=1750000/19750000	4.6%	=910000/19750000
9	Return on shareholders’ equity	25.3%	=1750000/6910000	15.0%	=910000/6070000
10	Earnings per share (assume 2 million shares outstanding)	0.88	=1750000/2000000	0.46	=910000/2000000