Joe has taken a loan of $5000 which is not being put into any use since cash of $14,444 is lying idle.
The high profitability and strong liquidity of indicates that the overall financial position Joe’s firm is quite strong. However, Joe should better utilize the resources to generate more revenue and expand his business.
C) The inventory costing method that a firm uses does affect the level of profit in the income statement of a company. If the closing inventory is overstated, the cost of goods sold decrease, since the closing inventory is deducted when calculating cost of goods sold, and when cost of goods sold decrease, net profit increase. The reason is that the units that remain in the closing inventory are not sold and hence they should not be included in the cost of goods sold.
For example, if a company has a revenue of $2000, opening inventory of $300, purchases of $700 and closing inventory of $175 using Average Cost method and $200 using FIFO method then its profit will be as