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Rare Metals: Ratios under LIFO or FIFO, explain diffs, purchases

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RareMetals. Inc. sells a rare metal found only in underdeveloped countries overseas. As a result of unstable governments in these countries and the rarity of the metal, the price fluctuates significantly. Financial information is given assuming the use of the first-in, first-out (FIFO) method of inventory valuation and also the last-in, first-out (LIFO) method of inventory valuation. Currents assets other than inventory total $1.230 and current liabilities total $1,600. The ending inventory balance are $1,350 for FIFO and $525 for LIFO.

REQUIRED:

A) Calculate the following ratios assuming RareMetals Inc. uses the FIFO method if inventory valuation: gross profit margin, operating profit margin, net profit margin, current ratio, and quick ratio.
B) Calculate the ratios listed in (a) assuming RareMetals Inc. uses the LIFO method of inventory valuation.
C) Evaluate and explain the differences in the ratios calculated in (a) and (b).
D) Will cash flow from operating activities differ depending on the inventory valuation method used? If so, estimate the difference and explain your answer.

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Solution Summary

See attached for ratios, the numerator and denominator and the computation of current assets. Click in cells in Excel to see computations.

Solution Preview

See attached for ratios, the numerator and denominator and the computation of current assets.

A. See left column.
B. See right column.
C. FIFO shows stronger profit ratios (gross margin, operating margin and net margin) as well as ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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