Problem H Cooper Company currently uses the FIFO method to account for its inven

Question

Problem H Cooper Company currently uses the FIFO method to account for its inventory but is considering a switch to LIFO before the books are closed for the year. Selected data for the year are:

1. Compute the current ratio, inventory turnover ratio, and rate of return on operating assets assuming the company continues using FIFO.

2. Repeat part (a) assuming the company adjusts its accounts to the LIFO inventory method.

Merchandise inventory, January 1 $1,430,000 Current assets 3,603,600 Total assets (operating) 5,720,000 Cost of goods sold (FIFO) 2,230,800 Merchandise inventory, December 31 (LIFO) 1,544,400 Merchandise inventory, December 31 (FIFO) 1,887,600 Current liabilities 1,144,000 Net sales 3,832,400 Operating expenses 915,200

Explanation / Answer

Current ratio Current assets / Current liabilities 3.15 Inventory turnover ratio cost of goods sold/ average inventory Average inventory (Opening + closing)/2 1658800 1.344827586 Rate of return on operating assets Net income/ total operating assets Net income Net sales- operating expenses 2,917,200 0.51 Ratios under LIFO Current ratio Current assets / Current liabilities Current asset 3,603,600 (Less) closing inventory under FIFO 1,887,600 Add Closing inventory under LIFO 1,544,400 Revised current asset 3,260,400 Current ratio 2.85 Inventory turnover ratio cost of goods sold/ average inventory Average inventory (Opening + closing)/2 1487200 1.5

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