fustrated
Apr 26, 2008, 10:46 AM
Using these Ratios that have been Computed from financial statements:
Current ratio = 1.75 ..........................(70,000 / 40,000)
Debt-to-equity ratio = .83...................(100,000 / 120,000)
Return on sales = .10.........................(40,000 / 390,000)
Additional information:
a.) Jane uses the LIFO method of inventory valuation. Beginning inventory was $30,000 andending inventory was $40,000. If jane used the fifo beginning inventory would have been $40,000 and ending inventrory would have been $55,000.
b.)Janes" sole depreciable asset was purchased on January 1, 2008. The asset cost $110,000 and is being depreciated over 10 years with no estimated salvage value. Although the 10 year life is within the acceptable range, most firms in Janes' industry depreciate similar assets over 8 years.
C.) For 2008, Jane decided to recognize a $15,000 liability for future enviromental cleanup costs. Most other firms in Janes industry have a similar enviromental cleanup obligation but have decided that the amounts of the obligations are not reasonable estimable at this time: on average, these firms recognized only 5% of their total enviromental cleanup obligation.
Show how the values of the 3 ratios computed above differ if Jane had used FIFO, depreciated the asset over 8 years and recognized only 5% of its enviromental cleanup obligation. Compute how the financial statements would differ if the alternative accounting methods had been used. Do not treat the use of these alternative methods as accounting changes. Ignore any income tax effects.
This is what I came up with:
a.) using fifo:
Ending inventory increases by 15,000 (55,000 - 40,000)
Net income for 2008 increases by 5,000 ( 40,000 - 30,000) - (55,000 - 40,000)
Beginning retained earnings increases by 10,000 (40,000 - 30,000)
b.) 10 year useful life:
Book value at December 31, 2008
10 year life: $110,000 - [($110,000 / 10) X 1 year] = 99,000
8 year life: $110,000 - [(110,000 / 8) X 1 year = 96,250
Book value decreases by $2,750 (99,000-96,250).
Net income for 2008 decreases by 2,750 [(110,000 / 8) - (110,000 / 10)]
Beginning retained earnings decreases by 2,750
c. Enviromental cleanup obligation:
Net income for 2008 increases by 2,612.50 [(2,750 X 5%)]
Enviromental cleanup obligation decreases by 2,612.50.
Adjusted current ratio: (70,000 + 15,000) / 40,000= 2.13%
Adjusted debt-to equity ratio: (100,000 - 2,612.50) / (120,000 + 5000 + 10,000 - 2,750 - 2,750 + 2,612.50 = .74
Adjusted return on sales: (40,000 + 5,000 - 2,750 + 2,612.50) / 390,000 = 11.5
My question is did I do this correctly and If I did not please help.
Thanks
Current ratio = 1.75 ..........................(70,000 / 40,000)
Debt-to-equity ratio = .83...................(100,000 / 120,000)
Return on sales = .10.........................(40,000 / 390,000)
Additional information:
a.) Jane uses the LIFO method of inventory valuation. Beginning inventory was $30,000 andending inventory was $40,000. If jane used the fifo beginning inventory would have been $40,000 and ending inventrory would have been $55,000.
b.)Janes" sole depreciable asset was purchased on January 1, 2008. The asset cost $110,000 and is being depreciated over 10 years with no estimated salvage value. Although the 10 year life is within the acceptable range, most firms in Janes' industry depreciate similar assets over 8 years.
C.) For 2008, Jane decided to recognize a $15,000 liability for future enviromental cleanup costs. Most other firms in Janes industry have a similar enviromental cleanup obligation but have decided that the amounts of the obligations are not reasonable estimable at this time: on average, these firms recognized only 5% of their total enviromental cleanup obligation.
Show how the values of the 3 ratios computed above differ if Jane had used FIFO, depreciated the asset over 8 years and recognized only 5% of its enviromental cleanup obligation. Compute how the financial statements would differ if the alternative accounting methods had been used. Do not treat the use of these alternative methods as accounting changes. Ignore any income tax effects.
This is what I came up with:
a.) using fifo:
Ending inventory increases by 15,000 (55,000 - 40,000)
Net income for 2008 increases by 5,000 ( 40,000 - 30,000) - (55,000 - 40,000)
Beginning retained earnings increases by 10,000 (40,000 - 30,000)
b.) 10 year useful life:
Book value at December 31, 2008
10 year life: $110,000 - [($110,000 / 10) X 1 year] = 99,000
8 year life: $110,000 - [(110,000 / 8) X 1 year = 96,250
Book value decreases by $2,750 (99,000-96,250).
Net income for 2008 decreases by 2,750 [(110,000 / 8) - (110,000 / 10)]
Beginning retained earnings decreases by 2,750
c. Enviromental cleanup obligation:
Net income for 2008 increases by 2,612.50 [(2,750 X 5%)]
Enviromental cleanup obligation decreases by 2,612.50.
Adjusted current ratio: (70,000 + 15,000) / 40,000= 2.13%
Adjusted debt-to equity ratio: (100,000 - 2,612.50) / (120,000 + 5000 + 10,000 - 2,750 - 2,750 + 2,612.50 = .74
Adjusted return on sales: (40,000 + 5,000 - 2,750 + 2,612.50) / 390,000 = 11.5
My question is did I do this correctly and If I did not please help.
Thanks