Good FSA Q

Comet Corporation is a capital intensive, growing firm. Comet operates in an inflationary environment and its inventory quantities are stable. Which of the following accounting methods will cause Comet to report a lower price-to-book ratio, all else equal? Inventory method Depreciation method A) First-in, First-out Straight-line B) First-in, First-out Accelerated C) Last-in, First-out Straight-line D) Last-in, First-out Accelerated

A. higher Equiy = Lower Ratio Higher Euqity - High NI Straight Line less dep. expense = higher income FIFO - COGS LOWER - Higher Income

Agree A

This might seem like a silly question, but I’m having a hard time recalling this; do higher inventory balances mean higher book value?

Yes. Inventory is a current asset. Higher inventory = higher current assets. All else equal, higher assets means higher equity.

It’s between A and B. In straight-line method the depr exp is spreaded out evenly. In accelerated method exp will be higher in the first yrs or first couple of yrs then lower. So in all the two methods will end up being the same at the end (generally). This is really a good question. I am gonna go with A since the question does not specify what point in time it’s referring to.

Answer is A. FIFO ( quantities in inventory stable, prices increasing) = higher Inventory value Single Line depreciation = Lower depreciation expensens at the beginning = Higher fixed assets Both contribute to higher Assets, hence a lower price-to-book ratio :slight_smile: Did I nail it?

What Keelim said

A FIFO in inflationary environment = higher ending inventory value SL depreciation means less accumulated depreciation therefore higher Good question…

Price/Book Value: i understand the depreciation part, but how inventory fits in the ratio. Book value = cost - accumulated dep? also how net income/equity are related to this ratio

i F’d that up a little… BUT a higher NI will increase your common shareholders equity which will also increae BV causing a lower Ratio…

definately A