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Financial Statement Analysis with FIFO/LIFO Considerations

Your company is considering the possible acquisition of ABC Company. Financial statements of ABC Company follow.

Balance Sheet.
2004 2003
Assets
Current assets:
Cash $64,346 $11,964
Accounts receivable less allowance
of $750 for doubtful accounts $99,021 $83,575
Inventories, FIFO $63,414 $74,890
Prepaid expenses $834 $1,170
Total Current Assets $227,615 $171,599
Investments and other assets $379 $175
Property, plant, and equipment:
Land and land improvements $6990 $6400
Buildings $63,280 $59,259
Machinery and Equipment $182,000 $156,000
$252,270 $221,659
Less: accumulated depreciation $110,000 $98,000
Net property, plant, and equip $142,270 $123,659
Total Assets $370,264 $295,433

Liabilities and Stockholders' Equity
Currentl liabilities:
Accounts payable $32,730 $26,850
Federal income taxes $5,300 $4,800
Accured liabilities $30,200 $24,500
Current portion of long term debt $5,500 $5,500
Total current liabilities $73,730 $61,650
Long term debt $76,750 $41,900
Other long term liabilities $5,700 $4,300
Deferred federal income taxes $16,000 $12,000
Total liabilities $172,180 $119,850
Stockholders' equity:
Capital stock $44,000 $43,500
Retained earnings $154,084 $132,083
Total Stockholders equity $198,084 $175,583
Total liabilities and stockholders equity $370,264 $295,433

Statement of income.
2004 2003 2002
Revenues $578,530 $523,249 $556,549
Cost and Expenses:
Cost of products sold $495,651 $457,527 $482,358
Selling, general, and admininstrative $35,433 $30,619 $29,582
Interest and debt expense $4,308 $3,951 $2,630
$535,392 $492,097 $514,570
Income before income taxes $43,138 $31,152 $41,979
Provision for income taxes $20,120 $12,680 $17,400
Net income $23,018 $18,472 $24,579
Net income per share $2.27 $1.85 $2.43

Partial footnotes: Under the LIFO method, inventores have been reduced by approximately $35,300 and $41,100 at December 31, 2004 and 2003, respectively, from current cost, whichwold be reported under the first in, first out method.
The effective tax rates were 36.6%, 30.7%, and 31.4%, respectively, for the years ended December 31, 2004, 2003, and 2002.

a. Compute the following for 2004, without considering the LIFO reserve:
1. Days' sales in inventory
2. Merchandise inventory turnover
3. Inventory turnover in days
4. Operating cycle
5. Working capital
6. Current ratio
7. Acid test ratio
8. Cash ratio
9. Debt ratio
10. Debt/equity ratio
11. Times interest earned
12. Net profit margin
13. Total asset turnover
14. Return on assets
15. Return on total equity
b. Compute teh ratios above considering the LIFO reserve.
c. Comment on the apparent liquidigy, debt, and profitability, considering both sets of ratios.

Solution Preview

Please find attached, a formatted MS Excel spreadsheet containing calculations, descriptions, as well as notes for the financial ratios listed below.

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Balance Sheets with LIFO consideration
Your company is considering the possible acquisition of ABC Company.  Financial statements of ABC Company follow.

Balance Sheet.
                                                 2004 2003
Assets
  Current assets:
      Cash $64,346 $11,964
      Accounts receivable less allowance
         of $750 for doubtful accounts 99,021 83,575
      Inventories, FIFO                                63,414 74,890
      Prepaid expenses 834 1,170
         Total Current Assets 227,615 171,599
      Investments and other ...

Solution Summary

This posting contains a formatted MS Excel spreadsheet which performs an in-depth study on the financial Statement of ABC Company, with FIFO/LIFO considerations.

$2.19