Based on the information on the next page, what inventory costing method does CarMax use? Do you believe this method is appropriate? Explain.

a). Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?

b). At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports the cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute the inventory turnover for both years. Interpret the ratio.

c). CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017, and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.

d). What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

e). (This question does not pertain to CarMax) In general, discuss how companies can use the lower of cost or market (LCM) rule to manage earnings? Please research and find two companies that have recently written-down their inventory as a result of the LCM rule. Provide details of the inventory write-down.

 

The asset side of the 2017 balance sheet for CarMax Inc. is below. Consolidated Balance Sheets - USD $ in Thousands (excerpts) CURRENT ASSETS: Cash and cash equivalents Restricted cash from collections on auto loan receivables Accounts receivable, net Inventory Other current assets TOTAL CURRENT ASSETS Auto loan receivables, net Property and equipment, net Deferred income taxes Other assets TOTAL ASSETS Feb. 28, 2017 38,416 380,353 152,388 2,260,563 41,910 2,873,630 10,596,076 2,518,393 150,962 140,295 $16,279,356 Feb. 29, 2016 37,394 343,829 132,171 1,932,029 26,358 2,471,781 9,536,892 2,161,698 161,862 127,678 $14,459,911