Question 5 You are in the process of analyzing two similar companies in the same

Question

Question 5 You are in the process of analyzing two similar companies in the same industry. You learn that they have different accounting practices and policies, as follows: 1. Company A, which has the same type of inventory as Company B, uses the FIFO cost formula while Company B uses average. Prices have generally been rising in this industry. 2. Company A uses the double-diminishing-balance depreciation method for most of its buildings, while Company B uses the straight-line method for its buildings. Considering only the impact of the choice of inventory cost formula, determine which company will report a higher (1) current ratio, (2) debt to total assets ratio, and (3) profit margin ratio, or whether the choice of cost formula will have no impact. This is the first year of operations for both companies. Higher (1) Current ratio (2) Debt to total assets ratio (3) Profit margin ratio Company A Company B No Imapct

Explanation / Answer

Company A will have higher profit and higher inventory value as it follows FIFO method. a Higher 1 Current ratio Company A 2 Debt to total assets ratio Company B 3 Profit margin ratio Company A

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