Compare effects of the inventory cost-flow assumptions FIFO and LIFO on the financial statements. Compare effects of
Question:
- Compare effects of the inventory cost-flow assumptions FIFO and LIFO on the financial statements. Compare effects of the depreciation method (SL or DDB) on the financial statements.
- Prepare the income statement. balance sheet. and the statement of cash flows using different accounting methods
- Understand how the choice of different accounting methods affects cash and accrual accounting.
Frasco and Lasco are virtually identical: both companies began operations at the beginning of the current year and during the year purchased inventory as follows:
During the first year. both companies sold 25,000 units of inventory. Fiasco uses the first-in. first-out (FIFO) method. and Lasco uses last-in. first-out (LIFO) method for inventory.
In early January both companies purchased equipment costing $200,000 with a 10-year estimated useful life and no residual value. Fiasco uses straight-line depreciation. and Lasco uses double-declining-balance depreciation for equipment.
Use the above information to answer the following questions.
1. Prepare a multi-step Income Statement for both companies in the space provided below.
2. Assuming all transactions are cash transactions, prepare a statement of Cash Flows. Also prepare the Supplement Schedule ? Indirect Method that reconciles net income and net cash from operating activities.
3. Prepare a Balance Sheet for both companies in the space provided below.
4.
a. Which company appears to be more profitable? (Frasco / Lasco / the same).
b. Which company generated more cash during the year? (Frasco I Lasco / the same) .
c. Which company presents a stronger balance sheet? (Frasco / Lasco I the same) Why? 5. On the Income Statement, why is net income different for Frasco and Lasco?
6. On the balance sheet, which accounts report different amounts? (Cash / Inventory / Equipment / Notes payable / Retained earnings) Why?
7. On the Statement of Cash Flows, which totals differ between Frasco and Lasco? Net cash from (operating / investing I financing 1 none) What conclusions can you draw from this Activity?
8. Different accounting methods, such as FIFO or LIFO and SL or DDB. affect (cash- / accrual-) basis accounting.
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild