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

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