Astro Languet established Languet Products Co. as a sole proprietorship on January 5, 2014. At the company's year end of December 31, 2014, the accounts had the following balances (in thousands):
A count of ending inventory on December 31, 2014, showed there were 4,000 units on hand.
Astro is now preparing financial statements for the year. He is aware that inventory may be casted using the FIFO or weighted average cost formula. He is unsure of which one to use and asks for your assistance. In discussions with Astra, you learn the following.
1. Suppliers to Languet Products provide goods at regular prices as long as Languet Products' current ratio is at least 2 to 1. If this ratio is lower, the suppliers increase their price by 10% in order to compensate for what they consider to be a substantial credit risk.
2. The terms of the long-term bank loan include the bank's ability to demand immediate repayment of the Joan if the debt-to-total-assets ratio is greater than 45%.
3. Astra thinks that, for the company to be a success, the rate of return on total assets should be at least 30%.
4. Astra has an agreement with the company's only employee that, for each full percentage point above a 25% rate of return on total assets, she will be given an additional one day off with pay in the following year.
(a) Prepare an income statement and a year-end balance sheet assuming the company applies:
1. The FIFO cost formula
2. The weighted average cost formula
(b) Identify the advantages of each formula in (a).
(c) Identify the disadvantages of each formula in (a).
(d) Which method do you recommend? Explain briefly.
(e) Considering the choice of inventory cost formulas that are available, do the ratios noted above adequately measure the financial performance of Languet Products from the perspective of the users?

  • CreatedSeptember 18, 2015
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