Sirotka Retail Company began doing business in 2015. The following information pertains to its first three years

Question:

Sirotka Retail Company began doing business in 2015. The following information pertains to its first three years of operation:

Assume the following:
• The income tax rate is 40%.
• Purchase and sale prices change only at the beginning of the year.
• Sirotka uses the LIFO cost flow assumption.
• Operating expenses are primarily selling and administrative expenses.
Required:
1. Compute cost of goods sold and the cost of ending inventory for each of the three years. (Identify the number of units and the cost per unit for each LIFO layer in the ending inventory.)
2. Prepare income statements for each of the three years.
3. Compute the LIFO reserve at the end of 2015, 2016, and 2017.
4. Compute the effect of LIFO liquidation on the net income of the company for the years 2016 and 2017.
5. Compute the inventory turnover ratio for the years 2016 and 2017. Do not make adjustments for any potential biases in LIFO accounting. Comment on the direction of the bias (that is, understated/overstated) in the inventory turnover ratio under LIFO. Is the ratio in one year more biased than in the other? Explain.
6. How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the information available in a LIFO financial statement?
Illustrate your approach by recomputing Sirotka's inventory turnover ratios for 2016 and 2017.
7. Compute the gross margin percentages for the years 2016 and 2017. Explain whether the difference in the gross margin percentages between 2016 and 2017 reflect the change in Sirotka's economic condition from 2016 and 2017.
8. Provide an estimate of the FIFO cost of goods sold for the years 2015, 2016, and 2017 using the information available in the financial statements.
9. Based on your answers to requirements 1 and 8, estimate Sirotka's tax savings for 2015, 2016, and 2017.
10. Assuming a discount rate of 10%, compute the January 1, 2015, present value of the tax savings over the period 2015-2017 (that is, discount the 2015 tax savings one period, and so on).

Inventory Turnover Ratio
Inventory Turnover RatioThe inventory turnover ratio is a ratio of cost of goods sold to its average inventory. It is measured in times with respect to the cost of goods sold in a year normally. Inventory Turnover Ratio FormulaWhere,... Ending Inventory
The ending inventory is the amount of inventory that a business is required to present on its balance sheet. It can be calculated using the ending inventory formula Ending Inventory Formula =... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Liquidation
Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due....