J.C. Penney Company, Inc. uses LIFO in applying the lower-of-cost-or-market. Recent financial statements were used to compile the following information (dollar figures in millions).
Average inventory (throughout the year).........................................$ 2,794
Current assets (at year-end) ..........................................................4,331
Current liabilities (at year-end) ......................................................2,241
Net sales ..............................................................................12,257
Cost of goods sold ....................................................................7,996
Gross profit (margin) .................................................................4,261
Instructions
a. Using the information provided, compute the following measures based on the LIFO method.
1. Inventory turnover.
2. Current ratio (see Chapter 5 for a discussion of this ratio).
3. Gross profit rate (see Chapter 6 for a discussion of this statistic).
b. Assuming the cost of goods sold would be lower under FIFO, what circumstances must the company have encountered to cause this situation? (Were replacement costs, on average, rising or falling?)
c. How would you expect these ratios to differ (i.e., what direction) had the company used FIFO instead of LIFO?