Matka Company began operations in 2010. At the beginning of the year, the company purchased plant assets of $450,000, with an estimated useful life of ten years and no residual value. During the year, the company had net sales of &650,000, salaries expense of $100,000, and other expenses of $40,000, excluding depreciation. In addition, Matka Company purchased inventory as follows:
Jan 15200 units at $400 $80,000
Mar 20100 units at $40,840,800
June 15400 units at $416,166,400
Sep 18300 units at $412,123,600
Dec9150 units at $42,063,000
Total 1,150 units $473,800
At the end of the year, a physical inventory disclosed 250 units still on hand. The managers of Matka Company know they have a choice of accounting methods, but they are unsure how those methods will affect net income. They have heard of the FIFO and LIFO inventory methods and the straight line and double declining balance depreciation methods.
Required:
1. Prepare two income statements for Matka Company, one using the FIFO and straight line methods and the other using the LIFO and double declining balance methods. Ignore income taxes.
2. Prepare a schedule accounting for the difference in the two net income figures obtained in requirement 1
3. What effect does the choice of accounting method have on Matka's inventory turnover? What conclusions can you draw? Use the year- end balance to compute the ratio?
4. How does the choice of accounting methods affect Matka's return on assets? Assume the company's only assets are cash of $40,000, inventory, and plant assets. Use your- end balances to compute the ratios. Is your evaluation of Matka's profitability affected by the choice of accounting methods?