Sirotka Retail Company began doing business in 20X1. The following information pertains to its first three years of operation: Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.) Purchases Sales Unit Operating Expenses $60,000 90,000 65,000 Unit Price $ 35 Year Units Cost Units 15,000 $20.00 20,000 5,000 12,000 18,000 10,000 20X1 20X2 25.00 40 20X3 30.00 40 Assume the following: • The income tax rate is 21%. • Purchase and sale prices change only at the beginning of the year. • Sirotka uses the LIFO cost flow assumption. • Operating expenses are primarily selling and administrative expenses. Required: 1. Compute cost of goods sold and the cost of ending inventory for each of the three years. 2. Prepare income statements for each of the three years. 3. Compute the LIFO reserve at the end of 20X1, 20X2, and 20X3. 4. Compute the effect of LIFO liquidation on the net income of the company for the years 20X2 and 20X3. 5. Compute the inventory turnover ratio for the years 20X2 and 20X3. Do not make adjustments for any potential biases in LIFO accounting. 6. How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the information available in a LIFO financial statement? Illustrate your approach by recomputing Sirotka's inventory turnover ratios for 20X2 and 20X3. 7. Compute the gross margin percentages for the years 20X2 and 20X3. 8. Provide an estimate of the FIFO cost of goods sold for the years 20X1, 20X2, and 20X3 using the information available in the financial statements. 9. Based on your answers to requirements 1 and 8, estimate Sirotka's tax savings for 20X1, 20X2, and 20X3. 10. Assuming a discount rate of 10%, compute the January 1, 20X1, present value of the tax savings over the period 20X1-20X3 (that is, discount the 20X1 tax savings one period, and so on).
Sirotka Retail Company began doing business in 20X1. The following information pertains to its first three years of operation: Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.) Purchases Sales Unit Operating Expenses $60,000 90,000 65,000 Unit Price $ 35 Year Units Cost Units 15,000 $20.00 20,000 5,000 12,000 18,000 10,000 20X1 20X2 25.00 40 20X3 30.00 40 Assume the following: • The income tax rate is 21%. • Purchase and sale prices change only at the beginning of the year. • Sirotka uses the LIFO cost flow assumption. • Operating expenses are primarily selling and administrative expenses. Required: 1. Compute cost of goods sold and the cost of ending inventory for each of the three years. 2. Prepare income statements for each of the three years. 3. Compute the LIFO reserve at the end of 20X1, 20X2, and 20X3. 4. Compute the effect of LIFO liquidation on the net income of the company for the years 20X2 and 20X3. 5. Compute the inventory turnover ratio for the years 20X2 and 20X3. Do not make adjustments for any potential biases in LIFO accounting. 6. How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the information available in a LIFO financial statement? Illustrate your approach by recomputing Sirotka's inventory turnover ratios for 20X2 and 20X3. 7. Compute the gross margin percentages for the years 20X2 and 20X3. 8. Provide an estimate of the FIFO cost of goods sold for the years 20X1, 20X2, and 20X3 using the information available in the financial statements. 9. Based on your answers to requirements 1 and 8, estimate Sirotka's tax savings for 20X1, 20X2, and 20X3. 10. Assuming a discount rate of 10%, compute the January 1, 20X1, present value of the tax savings over the period 20X1-20X3 (that is, discount the 20X1 tax savings one period, and so on).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Sirotka Retail Company began doing business in 20X1. The following information pertains to its first three years of
operation: Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of
1) (Use the appropriate factor(s) from the tables provided.)
Purchases
Sales
Operating
Expenses
$60,000
90,000
65,000
Unit
Unit
Year
Units
Cost
Units
Price
$ 35
15,000 $20.00
20,000
5,000
20X1
12,000
18,000
10,000
20X2
25.00
40
20X3
30.00
40
Assume the following:
• The income tax rate is 21%.
• Purchase and sale prices change only at the beginning of the year.
• Sirotka uses the LIFO cost flow assumption.
• Operating expenses are primarily selling and administrative expenses.
Required:
1. Compute cost of goods sold and the cost of ending inventory for each of the three years.
2. Prepare income statements for each of the three years.
3. Compute the LIFO reserve at the end of 20X1, 20X2, and 20X3.
4. Compute the effect of LIFO liquidation on the net income of the company for the years 20X2 and 20X3.
5. Compute the inventory turnover ratio for the years 20X2 and 20X3. Do not make adjustments for any potential
biases in LIFO accounting.
6. How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the
information available in a LIFO financial statement? Illustrate your approach by recomputing Sirotka's inventory
turnover ratios for 20X2 and 20X3.
7. Compute the gross margin percentages for the years 20X2 and 20X3.
8. Provide an estimate of the FIFO cost of goods sold for the years 20X1, 20X2, and 20X3 using the information
available in the financial statements.
9. Based on your answers to requirements 1 and 8, estimate Sirotka's tax savings for 20X1, 20X2, and 20X3.
10. Assuming a discount rate of 10%, compute the January 1, 20X1, present value of the tax savings over the period
20X1-20X3 (that is, discount the 20X1 tax savings one period, and so on).
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