Question

Dot Company began operations in 2012. At the beginning of the year, the company purchased plant assets of $900,000, with an estimated useful life of 10 years and no residual value. During the year, the company had net sales of $1,300,000, salaries expense of $200,000, and other expenses of $80,000, excluding depreciation. In addition, Dot purchased inventory as follows:


At the end of the year, a physical inventory disclosed 500 units still on hand. The managers of Dot 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 Dot 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 1.
3. What effect does the choice of accounting method have on Dot’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 Dot’s return on assets? Assume the company’s only assets are cash of $80,000, inventory, and plant assets. Use year-end balances to compute the ratios. Is your evaluation of Dot’s profitability affected by the choice of accounting methods? Explain youranswer.


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  • CreatedSeptember 10, 2014
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