Question

Cruz Company uses LIFO for inventory costing and reports the following financial data. It also recomputed inventory and cost of goods sold using FIFO for comparison purposes.

Year 2 Year 1
LIFO inventory $260 $210
LIFO cost of goods sold 840 780
FIFO inventory 330 235
FIFO cost of goods sold 795 780
Current assets (using LIFO) 320 290
Current assets (using FIFO) 390 315
Current liabilities 185 165

Required:
Compute its current ratio, inventory turnover, and days' sales in inventory for Year 2 using (a) LIFO numbers and (b) FIFO numbers.

Answer 1

The computations of Cruz Company's current ratio, inventory turnover, and days' sales in inventory for Year 2, are as follows, using:

                                    (a) LIFO numbers           (b) FIFO numbers

1. Current ratio  =                    1.73                               2.11

2. Inventory turnover =           3.57x                           2.81x

3. Days' sales in inventory =  102.1 days        129.7 days

What are the current ratio, inventory turnover, and days' sales in inventory?

The current ratio is computed by dividing the current assets by the current liabilities.

The inventory turnover ratio is the cost of goods sold divided by the average inventory.

The days' sales in inventory is the average inventory divided by the cost of goods sold and multiplied by 365 days.

Data and Calculations:

                                                Year 2          Year 1

LIFO inventory                        $260           $210

Average LIFO inventory for Year 2 = $235 ($260 + $210)/2

LIFO cost of goods sold           840            780

FIFO inventory                          330            235

Average FIFO inventory for Year 2 = $282.5 ($330 + $235)/2

FIFO cost of goods sold          795             780

Current assets (using LIFO)    320             290

Current assets (using FIFO)    390              315

Current liabilities                      185              165

The actual computations of Cruz Company's current ratio, inventory turnover, and days' sales in inventory for Year 2, are as follows, using:

               (a) LIFO numbers                     (b) FIFO numbers

1. Current ratio = Current Assets/Current Liabilities

                  =  1.73 ($320/$185)                2.11 ($390/$185)

2. Inventory turnover = Cost of goods sold / Average Inventory

                 = 3.57x ($840/$235)              2.81x ($795/$282.5)

3. Days' sales in inventory = Average Inventory/Cost of goods sold x 365

            = 102.1 days ($235/$840 x 365)  129.7 days ($282.5/$795 x 365)

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