The following information applies to the questions displayed below mall business

Question

The following information applies to the questions displayed below mall business loans division. The bank has You have been given responsibility for overseeing a bank's s Included loan covenants requiring a minimum current ratio of 12 in all small business loans. When you ask which inventory costing method the covenant assumes, the previous loans manager gives you a blank look. To explain to him that a company's inventory costing method Is important, you present the following balance sheet information. Current assets other than Inventory Inventory Other (noncurrent) assets $ 25 143 s (b) Total assets Current liablities Other (noncurrent) lablities Stockholders equity $ 45 50 (cl) Total liabilities and stockholders equity S (c) You ask the former loans manager to find amounts for ta, (b) (c, and (d) essuming the company began the year with 3 units of inventory at o unit cost of $10, then purchased 6 unts at o cost of $11 each. and finally purchased 4 units at a cost of S15 each A year-end inventory count determined that 2 units are on hand

Explanation / Answer

units rate cost 1) Using FIFO Opening Stock 3 10 30 Purchase 6 11 66 Purchase 4 15 60 Closing stock 2 15 30 Sales(Balancing Figure) 11 Closing stock under FIFO to be valued at last purchase. a)Inventory 30 b)Total assets:- Current assets other than inventory 25 Inventory 30 Other Non current assets 143 Total 198 c)Total Liabilities and Stockholders Equity is equal to Total assets.that is 198 d)Stockholders Equity:- Total Liabilities and Stockholders Equity 198 Less:Current liabilities -45 Less:Other non current liabilities -50 Stockholders Equity 103 2) Using Weighted average method units rate cost Opening Stock 3 10 30 Purchase 6 11 66 Purchase 4 15 60 total 13 36 156 Weighted average cost per unit=total cost of goods available for sale/total number of units=156/13=12 Inventory under Weighted average cost=12*2=24                   a)Inventory 24 b)Total assets:- Current assets other than inventory 25 Inventory 24 Other Non current assets 143 Total 192 c)Total Liabilities and Stockholders Equity is equal to Total assets.that is 192 d)Stockholders Equity:- Total Liabilities and Stockholders Equity 192 Less:Current liabilities -45 Less:Other non current liabilities -50 Stockholders Equity 97 3) Using LIFO Method Inventory will be value at First purchase or opening stocks cost per unit. here inventory is valued at opening stocks cost per unit therefore Invenory =10*2=20 a)Inventory 20 b)Total assets:- Current assets other than inventory 25 Inventory 20 Other Non current assets 143 Total 188 c)Total Liabilities and Stockholders Equity is equal to Total assets.that is 188 d)Stockholders Equity:- Total Liabilities and Stockholders Equity 188 Less:Current liabilities -45 Less:Other non current liabilities -50 Stockholders Equity 93 4) Current Ratio=Current Assets/Current liabilities a)Current Ratio using FIFO A)Current assets:- Current assets other than inventory 25 Inventory 30 total(A) 55 B)Current liabilities 45 Current Ratio=A/B 1.22 b)Current Ratio using Weighted average A)Current assets:- Current assets other than inventory 25 Inventory 24 total(A) 49 B)Current liabilities 45 Current Ratio=A/B 1.09 c)Current Ratio using LIFO A)Current assets:- Current assets other than inventory 25 Inventory 20 total(A) 45 B)Current liabilities 45 Current Ratio=A/B 1.00 5) a)The company is in compliance with loan covenant using FIFO method as its current ratio is 1.22 which is higher than 1.2 b)The company is not in compliance with loan covenant using Weighted Average method as its current ratio is 1.09 which is less than 1.2 c)The company is not in compliance with loan covenant using LIFO method as its current ratio is 1.00 which is less than 1.2

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