Question #1 (15 Points)

Presented below are the condensed financial statements of Excel Athletics:

EXCEL ATHLETICS Condensed Balance Sheet (Amounts in thousands) Year 2 Year 1 Assets Current assets (excluding inventory) $2,520.0 $3,048.0 Inventory 5,011.0 5,250.0 Noncurrent assets 8,607.0 9,996.0 Total assets $16,138.0 $18,294.0 Liabilities and shareholders equity Current liabilities $3,060.0 $5,085.0 Noncurrent liabilities 2,982.0 2,913.0 Total liabilities 6,042.0 7,998.0 Common stock 1,431.0 540.0 Retained earnings 8,665.0 9,756.0 Total liabilities and shareholders equity $16,138.0 $18,294.0

EXCEL ATHLETICS Condensed Income Statement (Amounts in thousands) Year 2 Year 1 Sales $22,839.0 $25,794.0 Cost of goods sold 18,515.0 20,872.0 Selling, general, administrative expenses 2,145.0 2,532.0 Income taxes 702.0 696.0 Net income $ 1,477.0 $ 1,694.0

The footnotes to the financial statements reveal that the company uses LIFO to account for its inventory, and that the value of the companys LIFO reserve was as follows: Amounts in thousands Year 2 Year 1 LIFO Reserve $1,128 $1,015

A. Restate the companys net income for Year 2 to reflect the use of FIFO instead of LIFO. Assume an effective tax rate of 30 percent.

B. Assuming a change to FIFO is made for income tax purposes, how much will income taxes change for Year 2?

C. Calculate the new balances of the companys balance sheet accounts as of December 31, Year 2 to reflect a change to FIFO.

D. Calculate the current ratio for Year 2 under FIFO and LIFO. Under which inventory method does the company appear more liquid?