LIFO versus FIFO—impact on ROI. Natco, Inc., uses the FIFO inventory cost-flow a
ID: 2386880 • Letter: L
Question
LIFO versus FIFO—impact on ROI. Natco, Inc., uses the FIFO inventory cost-flowassumption. In a year of rising costs and prices, the firm reported net income of $480,000 and average assets of $3,000,000. If Natco had used the LIFO cost-flow assumption in the
same year, its cost of goods sold would have been $80,000 more than under FIFO, and its
average assets would have been $80,000 less than under FIFO.
Required:
a. Calculate the firm’s ROI under each cost-flow assumption.
b. Suppose that two years later costs and prices were falling. Under FIFO, net
income and average assets were $576,000 and $3,600,000, respectively. If LIFO had
been used through the years, inventory values would have been $100,000 less than
under FIFO, and current year cost of goods sold would have been $400,000 less
than under FIFO. Calculate the firm’s ROI under each cost-flow assumption.
Explanation / Answer
a. Using FIFO: Net income = $480000; Average Assets = $3,000,000 ROI = Net income/average assets = 480000/3000000 = 0.16 = 16% Using LIFO:Net income = $480000-80000=$400000; Average Assets = $3,000,000-80000=$2,920,000 ROI = Net income/average assets = 400000/2920000 = 0.137 = 13.7% b. Using FIFO: Net income = $576,000; Average Assets = $3,600,000 ROI = Net income/average assets = 576000/3600000 = 0.16 = 16% Using LIFO:Net income = $576,000+400,000=$976,000; Average Assets = $3,000,000-100,000=$2,900,000 ROI = Net income/average assets = 976000/2900000 = 0.337 = 33.7%
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