You have been given responsibility for overseeing a bank’s small business loans
ID: 2392563 • Letter: Y
Question
You have been given responsibility for overseeing a bank’s small business loans division. The bank has included loan covenants requiring a minimum current ratio of 1.3 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.
You ask the former loans manager to find amounts for (a), (b), (c), and (d) assuming the company began the year with 3 units of inventory at a unit cost of $12, then purchased 6 units at a cost of $13 each, and finally purchased 4 units at a cost of $17 each. A year-end inventory count determined that 2 units are on hand.
Inventory:
Total Assets:
Total Liabilities and Stockholders' Equity:
Stockholders' Equity
Inventory:
Total Assets:
Total Liabilities and Stockholders' Equity:
Stockholders' Equity
You have been given responsibility for overseeing a bank’s small business loans division. The bank has included loan covenants requiring a minimum current ratio of 1.3 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.
Explanation / Answer
Solution 1a:
Under FIFO ending inventory will consist from final purchase quantity of 4 units.
Therefore value of ending inventory = 2* $17 = $34
Total Assets (b) = Current assets + Inventory + Other assets = $32 + $34 + $147 = $213
Total liabilities and stockholders’ equity (c) = Total Assets = $213
Stockholders’ equity (d) = Total liabilites and stockholder's Equity - Current liabilities - Other liabilities
= $213 - $50 - $65 = $98
Solution 1b:
Total cost of goods available for sale= (3*$12) +(6*$13) + (4*$17)= $182
Units available for sale = 3+ 6 + 4 = 13
Average cost per unit = $182 / 13 = $14 per unit
Units in ending inventory = 2 units
Value of ending inventory under weighted average cost = 2 * $14 = $28
Total Assets (b) = Current assets + Inventory + Other assets = $32 + $28 + $147 = $207
Total liabilities and stockholders’ equity (c) = Total Assets = $207
Stockholders’ equity (d) = Total liabilites and stockholder's Equity - Current liabilities - Other liabilities
= $207 - $50 - $65 = $92
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