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Impact on ROI of Inventory Flow Assumptions

LIFO versus FIFO - impact on ROI Natco, Inc uses the FIFO inventory cost flow assumption. In a year of rising costs and prices, the reported net income of $480,000 and average assets were $3,000,000. If Natco had used the LIFO cost-flow assumption in the same year, its cost of goods sold would have been $80,000 more than under FIFO, and its average assets would have been $80,000 less than under FIFO.

Required:

a. Calculate the firm's ROI under each cost-flow assumption.
b. Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $576,00 and $3,600,000, respectively. If LIFO had been used through the years, inventory values would have been $100,000 less than under FIFO, and current year cost of goods sold would have been $40,000 less than under FIFO. Calculate the firm's ROI under each cost-flow assumption.

Solution Summary

This solution illustrates how to compute the impact of alternative inventory flow assumptions on a company's return on investment.

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