# Inventories question

If you can do this you have mastered inventories: Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in \$): Cash…\$1,100,000 Accounts Receivable…300,000 Inventory…2,400,000 Property, Plant & Eq…8,000,000 ------------------------------------------------ Total Assets…11,800,000 ---------------------------------------------- LIFO Reserve at Jan. 1 600,000 LIFO Reserve at Dec. 31 900,000 Accounts Payable…\$400,000 Deferred Tax Liability…700,000 Long-term Debt…8,200,000 Common Stock…1,000,000 Retained Earnings…1,500,000 ---------------------------------------------------- Total Liabilities & Equity…11,800,000 Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40 percent. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to: A) 3.63 B) 3.73 C) 4.18 D) 4.06

In fairness to all, this problem has been recently discussed on the forum. FIFO Inventory = LIFO Inventory+ LIFO Reserve = 2,400,000+900,000=3,300,000 FIFO to LIFO increases RE by (1-tax rate)*LIFO Reserve = 0.6*900,000= 540,000, that is the Equity increases to 2,500,000+540,000=3,040,000 FIFO to LIFO also increases DTL by Tax Rate*LIFO Reserve = 0.4*900,000=360,000 Since the problem states that additional taxes were paid, that means Cash got down by the amount of DTLs generated at conversion, so Cash goes to 1,100,000-360,000=740,000, and Assets becomes: 11,800,000-360,000+900,000=12,340,000 That’s an A/E ratio of 12,340,000/3,040,000=4.05921, say D for 4.06.

ohh yeah, i’ve never seen it before good job map1, i definitely didn’t get that one right

map1 Wrote: ------------------------------------------------------- > In fairness to all, this problem has been recently > discussed on the forum. > > FIFO Inventory = LIFO Inventory+ LIFO Reserve = > 2,400,000+900,000=3,300,000 > > FIFO to LIFO increases RE by (1-tax rate)*LIFO > Reserve = 0.6*900,000= 540,000, that is the Equity > increases to 2,500,000+540,000=3,040,000 > > FIFO to LIFO also increases DTL by Tax Rate*LIFO > Reserve = 0.4*900,000=360,000 > > Since the problem states that additional taxes > were paid, that means Cash got down by the amount > of DTLs generated at conversion, so Cash goes to > 1,100,000-360,000=740,000, and Assets becomes: > 11,800,000-360,000+900,000=12,340,000 > > That’s an A/E ratio of > 12,340,000/3,040,000=4.05921, say D for 4.06. hmmm, okay, but why did you incease the assets by 900,000 (the LIFO reserve amount) ??? and why did you convert LIFO to FIFO (\$3.3M) but never use it ?

1. because that’s how you convert from LIFO to FIFO, the entire reserve gets re-distributed between retained earnings and deferred tax liabilities, is not like I’m adding only the change in the LIFO reserve to determine the ending value of inventory under FIFO when I know the beginning value of inventory under FIFO, to determine COGS, or anything else 2. Oh but I did, check the new total assets value: it reflects the drop in the Cash position (due to paid taxes) and the increase in inventory due to conversion

cash down by 360k inventory up by 900k assets up by 540k NI & Equity up by = 900-360k= 540k so assets to equity 12340/ 2500 + 540 = 12340/3040 I get D as answer.

this problem took me 3 minutes to just absorb information to understand what needs to be done. is this okay to take 3 mins?

pepp Wrote: ------------------------------------------------------- > this problem took me 3 minutes to just absorb > information to understand what needs to be done. > is this okay to take 3 mins? I get scared if it takes longer than 90 seconds to do ANY problem. that is how much we have on average. the trick will be to pace ourselves and do 40 questions and hour. Some will take a lot less than 90 seconds, many will take several minutes. I take the longest on FSA and some ethics, which I read twice.

map1 Wrote: ------------------------------------------------------- > In fairness to all, this problem has been recently > discussed on the forum. > > FIFO Inventory = LIFO Inventory+ LIFO Reserve = > 2,400,000+900,000=3,300,000 > > FIFO to LIFO increases RE by (1-tax rate)*LIFO > Reserve = 0.6*900,000= 540,000, that is the Equity > increases to 2,500,000+540,000=3,040,000 > > FIFO to LIFO also increases DTL by Tax Rate*LIFO > Reserve = 0.4*900,000=360,000 > > Since the problem states that additional taxes > were paid, that means Cash got down by the amount > of DTLs generated at conversion, so Cash goes to > 1,100,000-360,000=740,000, and Assets becomes: > 11,800,000-360,000+900,000=12,340,000 > > That’s an A/E ratio of > 12,340,000/3,040,000=4.05921, say D for 4.06. Maybe A ? LIFO Reserve add direct to RE. 12,340,000/3,400,000 = 3.629