Chapter 12, Problem 93PSA

Accounting Alternatives and Financial Analysis

Lemon Automobiles has asked your bank for a $100,000 loan to expand its sales facility. Lemon provides you with the following data:

Your inspection of the financial statements of other automobiles sales firms indicates that most of these firms adopted the LIFO method in the late 1970s. You further note that Lemon has used 5% of depreciable asset cost when computing depreciation expense and that other automobile dealers use 10%. Assume that Lemon’s effective tax rate is 25% of income before tax. Also assume the following:

Required:

1. Compute cost of goods sold for 2017-2019. using both the FIFO and the LIFO methods.

2. Compute depreciation expense for Lemon for 20l72019. using both 5% and 10% of the cost of depreciable assets.

3. Recompute Lemon’s net income for 2017--2019. using LIFO and JOY0 depreciation. (Don’t forget the tax impact of the increases in cost of goods sold and depreciation expense.,)

4. CONCEPTUAL CONNECTION Explain whether Lemon appears to have materially changed its financial statements by the selection of FIFO (rather than LIFO) and 5% (rather than 10%) depreciation.