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Financial Reporting and Analysis - Essay Example

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The LIFO reserve calculation in inflationary environment where the value of FIFO is higher than the value of LIFO inventory is LIFO Reserve=valuation by FIFO –valuation by LIFO. In a deflationary environment, LIFO Reserve has a possibility of having a negative balance caused by LIFO inventory valuation being higher than its FIFO valuation. LIFO reserve indicates the value which a business entity taxable income as a result of using LIFO method has subsequently been deferred. The balance on LIFO reserve account in 2008 is $524.4 c) If LIFO reserve account was added to the inventory at LIFO, the resulting inventory at the end of 2008 would be $1,346.8. I would consider inventory under LIFO to be more realistic. d) Use of LIFO or FIFO during price increase results to an inflated amount of income. During price decreases, it results to lower income. During constant prices, a normal income results when FIFO or LIFO is used. e) Use of LIFO or FIFO results to inflated cash flows during price increase, a lower cash flow during price decreases and a normal cash flows during normal costs assuming no increase or decrease in inventory quantity. This is a similar case in both pre-tax and after-tax cash flows. g) LIFO layer is an excess of the inventory at base of the current period and the inventory base of previous period LIFO liquidation occurs when the purchase are less than the sales that the inventory costs which are older are utilized in determining the costs of the goods sold. During the periods of rising and LIFO valuation is used, LIFO liquidation that occurs will result to a relatively low COGAS and an amount of income that is inflated. Case 6-4 Diversified Technology. (a)1)Day sales receivables =net sales/365 In 2007 $24,462/365 = $67.019 In 2008 $25,269/365 = $69.23 2) Accounts Receivable turnover = credit sales (net)/average accounts receivables Average account receivables= {($3195+$85) + ($3362+$75)}/2 = $3358.50 Receivable turnover =25269/3358.50 = 7.524 3) Day sales in inventory = number of days in a year (365)/inventory turnover ratio In 2008: 365/8.3867=43.521 In 2007: 365/8.577=42.555 4) Inventory turnover ratio=sales/inventory 2008: $25269/ 3013 =8.3867 2007: $24462/2852 =8.577 5) Working capital = current assets - current liabilities In 2008: $9598- $5,839 = $3759 1n 2007: $9838 - $5,362 = $4476 6) Current ratio = current assets/current liabilities In 2008 = $9598/$5839= 1.644 In 2007 $ 9,838 /$5362 = 1.835 7) Acid test ratio = (current assets – inventory)/current liabilities In 2008: ($9598-$3013)/$5839 = 1.179 In 2007 : (9838-$2852)/$5362 = 1.303 b) Comment on each ratio Day sales receivables indicate the total average number of days taken in collection of all the accounts receivable. It takes around 67 and 69 days in both years. Accounts Receivable turnover is seven as per the calculations. A lower the turnover means a longer the receivables are being held thus the company have an average turnover rate. Day sales in inventory are 43.5 and 42.5 in 2008 and 2007 respectively. It shows number of days in average to sell average inventory in a specified period that is obviously one year. The company is in a position to meet its current obligations within the two years because it had a positive working capital and this shows the company in short term, is healthy. The current ratio of 2:1 can be regarded as acceptable. The company current ratio is acceptable since it can be approximated to 2:1 in the two years. Acid test ratio indicates that the firm already has short term assets that are enough to cover the liabilities that are immediate because it is more than one in both years. c) Comment on liquidity: the current ...Show more


Case 6-1 steel making a)Working capital=current assets –Current Liabilities $2,002.8-$734.2=$1,268.6 b) LIFO reserve account records LIFO reserve which is the difference between the values of inventory accounting cost calculated using FIFO method and the one that is calculated using LIFO method. …
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Financial Reporting and Analysis
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