Finance 3.1-3.5
Questions and Problems (3.1-3.15)
3.1 Balance Sheet: Given the following information about Elkridge Sporting Goods, Inc. construct a balance sheet for June 30, 2011. On that date the firm had cash and marketable securities of $25,135, accounts receivable of $43,758, inventory of $167, 112, net fixed assets of $345, 422, and other assets of $13,125. It had accounts payables of $67,855, notes payables of $36,454, long-term debt of $233,125, and common stock of $150,000. How much retained earnings did the firm have?
A= $97,118
3.2 Inventory accounting: Differentiate between FIFO and LIFO.
A= FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO is Last In, First Out, which means goods most recently added to the inventory are sold first so the unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation to be lower in inflationary times.
3.3 Inventory accounting: Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement.
A= FIFO makes sense during times of rising prices because it allows the firm to eliminate the lower-priced inventory first, which results in higher profit margins.
3.4 Market-value accounting: How does the use of market-value accounting help managers?
A= Market-value accounting of both assets and liabilities allows managers to have a truer picture of their company's financial condition and to do a better job of estimating cash flows that the assets would generate. However, marking-to-market is not as easy as it sounds because of the difficulties involved in coming up with the correct market value of current assets and liabilities.
3.5 Working Capital: Laurel Electronics reported the following information at its annual meeting: The company had cash and
3.1 Balance Sheet: Given the following information about Elkridge Sporting Goods, Inc. construct a balance sheet for June 30, 2011. On that date the firm had cash and marketable securities of $25,135, accounts receivable of $43,758, inventory of $167, 112, net fixed assets of $345, 422, and other assets of $13,125. It had accounts payables of $67,855, notes payables of $36,454, long-term debt of $233,125, and common stock of $150,000. How much retained earnings did the firm have?
A= $97,118
3.2 Inventory accounting: Differentiate between FIFO and LIFO.
A= FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO is Last In, First Out, which means goods most recently added to the inventory are sold first so the unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation to be lower in inflationary times.
3.3 Inventory accounting: Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement.
A= FIFO makes sense during times of rising prices because it allows the firm to eliminate the lower-priced inventory first, which results in higher profit margins.
3.4 Market-value accounting: How does the use of market-value accounting help managers?
A= Market-value accounting of both assets and liabilities allows managers to have a truer picture of their company's financial condition and to do a better job of estimating cash flows that the assets would generate. However, marking-to-market is not as easy as it sounds because of the difficulties involved in coming up with the correct market value of current assets and liabilities.
3.5 Working Capital: Laurel Electronics reported the following information at its annual meeting: The company had cash and