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Lifo method of inventory valuation

Case Scenario:

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 TO DO:

Problem 1: 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.

Problem 2: Calculate the ratios listed in (a) assuming RareMetals Inc. uses the LIFO method of inventory valuation.

Problem 3: Evaluate and explain the differences in the ratios calculated in (a) and (b).

Problem 4: Will cash flow from operating activities differ depending on the inventory valuation method used? If so, estimate the difference and explain your answer.

RareMetals Inc. Income Statements (In Thousands) | |||||||

FIFO | LIFO | ||||||

Net sales | $3,000 | $3,000 | |||||

Cost of goods sold | 1,400 | 2,225 | |||||

Gross profit | 1,600 | 775 | |||||

Selling, general, and administrative | 600 | 600 | |||||

operating profit | 1,000 | 175 | |||||

Interest expense | 80 | 80 | |||||

Earnings before taxes | 920 | 95 | |||||

Provision for income taxes | 322 | 33 | |||||

Net earnings | $598 | 62 |

Now Priced at $25 (50% Discount)

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