Question #$1$

$50$ marks

Granville Sharp established Granville Products Co$.$ as a sole proprietorship on January $2,2019.$ At the company$$s year end of December $31,2019,$ the accounts had the following balances:

Currents assets, excluding inventory $ $10,000$

Other assets $($long$-$term$)107,000$

Current liabilities $30,000$

Long$-$term bank loan $50,000$

Capital $($Owner$$s investment, excluding income$)40,000$

Purchases during the year:

January $5$: $6,000$ @ $$16$ $$96,000$

June $30$: $8,000$ @ $$1296,000$

December $10$: $5,000$ @ $$1155,000$

Sales $$284,000$

Other expenses $40,000$

A count of ending inventory on December $31,2019,$ showed that there were $3,500$ units on hand.

Granville is now preparing financial statements for the year. He is aware that inventory cost may be calculated using FIFO or LIFO method. He is unsure of which one to use and asks for your assistance. In discussions with Granville, you learn the following.

$1.$ Suppliers provide goods at regular prices as long as Granville Products$$ current ratio $($CR$)$ is at least $2$ to $1.$ If CR is lower, the suppliers increase their price by $10\%$ in order to compensate for what they consider to be a substantial credit risk.

$2.$ The terms of the long$-$term bank loan include the bank$$s ability to demand immediate repayment of the loan if the debt$-$to$-$total$-$assets ratio $($TL$/$TA$)$ is greater than $47\%.$

$3.$ Granville thinks that, for the company to be a success, the rate of return on total assets, ROA, calculated as NI$/$TA$,$ should be at least $30\%.$

$4.$ Granville has an agreement with the company$$s only employee, Safa, that for each full percentage point above a $25\%$ ROA, she will be given an additional one day off with pay in the following year.

Required:

a$.$ Calculate EI and CGS under FIFO and LIFO. $(6$ marks$)$

b$.$ Prepare an income statement for $2019$ and a year $(2019)$ end B$/$S under FIFO and LIFO. $(10$ marks$)$

c$.$ Calculate CR$,$ TL$/$TA$,$ and ROA $($NI$/$TA$)$ under each method, to one decimal place. $(9$ marks$)$

Use the following format for I$/$S and B$/$S

I$/$S:

FIFO LIFO

Sales

CGS

GP

Other expenses

NI

B$/$S:

FIFO LIFO

Current assets, excluding inventory.

Inventory

Total current assets

Other assets $($long$-$term$)$

Total assets

Current liabilities

Long$-$term bank loan

Total liabilities

Capital $($including income$)$

Total liabilities and owners$$ equity

d$.$ Evaluate the consequences of these $3$ ratios in terms of the constraints and agreements. $(12$ marks$)$

e$.$ Safa would receive how many days off in $2020$ under each method? $(5$ marks$)$

f$.$ Which method would Safa recommend and why? $(2$ marks$).$ Which method do you recommend and why? $(6$ marks$)$