Question

Mannisto Inc. uses the FIFO Inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $200,246 and average assets of $1,465,400. If Mannisto had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $42.030 more than under FIFO, and its average assets would have been $39,520 less than under FIFO. Required: a. Calculate the firm's ROI under each cost flow assumption (FIFO and LIFO). (Enter your answers as percentages rounded to 1 decimal place (i.e., 12.2%).) FIFO L IFO b. Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $243,686 and $1.772.970, respectively. If LIFO had been used through the years, Inventory values would have been $44,060 less than under FIFO, and current year cost of goods sold would have been $19,278 less than under FIFO. Calculate the firm's ROI under each cost flow assumption (FIFO and LIFO). (Enter your answers as percentages rounded to 1 decimal place (.e., 12.2%).) FIFO L IFO ROL % %

Answer 1

1. Cost of goods sold has inverse relation with net income. This means that whenever the cost of goods sold increase, net income decreases and if cost of goods sold decrease, the net income increases. The impact is measured below accordingly.

	FIFO	LIFO
Net income (A)	200,246	200,246- 42,030 = $ 158,216
Average assets (B)	1,465,400	1,465,400 – 39,520 = $ 1,425,880
ROI = A/B	13.7%	11.1%

2. Inventory forms part of current assets. Hence, it is included in average assets. If LIFO would have been used, inventory would have been less, hence, that portion of inventory is deducted from average assets.

	FIFO	LIFO
Net income (A)	243,686	243,686+19,278 = 262,964
Average assets (B)	1,772,970	1,772,970-44,060 = 1728,910
ROI = A/B	13.7%	15.2%

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