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Highest COGS / Net Income

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1. An inventory pricing method in which the oldest costs rarely have an effect on the ending inventory valuation is?

2.Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method How does it affect prices?

During 2007, the first year of operations, Sanders Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

A. Which of the following recording procedures would result in the highest cost of goods sold for 2007?
1. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement
2. Recording purchases at gross amounts

B. Which of the following recording procedures would result in the highest net income for 2007?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement
a. 1
b. 2

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1. FIFO. In FIFO the earliest units are assumed to be sold first and so the ending inventory would consist of latest units and so the older costs would have no effect on ending inventory

2. In FIFO the earliest units are ...

Solution Summary

The solution explains the procedures which would result in highest cost of goods sold / net income

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Pro forma income statements assuming new assets are purchased

The 2004 I/S and other information for Mallard Corp., which is about to purchase a new machine at a cost of $450 and a new computer system at a cost of $330, appears next.
Sales $1,000
COGS 700t
Gross profit 300
Operating expenses 100
Income b/ taxes 200
Income taxes 80
Net income $120

Additional information:
- Two new assets are expected to generate a 20% annual rate of growth in the firm's sales.
- The firm will include the depreciation expense on the machine as part of COGS and the depreciation expense on the computer system as part of operating expenses.
- Excluding the depreciation on the new machine, the firm's COGS is expected to increase at an annual rate of 5%.
- Excluding the depreciation on the new computer system, the firm's operating expenses are expected to increase at an annual rate of 8%.
- Average total assets in 2004 were $900. Expected average gross total assets in 2005, 2006, & 2007 are $960, $1,080, & $1,050, respectively.
- Both the machine and the computer system have a three-year useful life and a zero salvage value.
- Assume an income tax rate of 30%.

Required:

a. Assume that the assets are purchased on January 1, 2005. Prepare pro forma income statements for 2005 through 2007 with the straight-line depreciation method for the new assets.

b. Repeat requirement a, assuming instead that the firm elects to use the sum-of-the-years' digits method.

c. For both requirements 1 & 2, calculate the firm's gross profit rate (gross profit divided by sales), NOPAT margin (net operating profit after tax divided by sales), and return on assets (NOPAT divided by total assets). How does the use of the different depreciation methods affect the behavior of the ratios over the period? Which method would management choose to maximize their personal wealth?

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