This study source was downloaded by 100000859094778 from CourseHero com on 12 29 2022 11 16 46 GMT 06 00 https www coursehero com file 83173619 FSA Tutorial 4 Analyzing Investing Activitiesdoc BBMF3063 Financial Statement AnalysisTutorial 4 Analyzing Investing Activities1 a Identify the main concerns in analysis of accounts receivable One of the main concerns in analysis of account receivable is genuine due and enforceable Theother concern is the probability of collection is properly evaluated Although the opinions of anindependent auditor can provide certain assurance for these issues the financial analyst mustrecognize the possibility of misjudgment and luck of complete independence b Describe information other than that usually available in financial statements that we should collect to assess the risk of non collectibility of receivables The description of the receivable usually does not have enough information to reliable determinewhether a receivable is genuine due and enforceable Therefore the knowledge of industrypractices and supplementary sources of information must be use for additional assurance Forinstance there is substantial right to return goods for certain companies so allowance must beprovided for this Hence the analysts must use their past experience own judgement andknowledge of the industry to assess the adequacy of provision for uncollectable accounts 2 Compare and contrast the effects of LIFO and FIFO inventory costing methods on earnings in an inflationary period Provide Illustration AnswerLast in First Out LIFO is one of the inventory costing methods whereby the cost of goods soldis measures by the recent costs and the ending inventory will be the oldest costs First In First Out FIFO is another inventory costing method that the costs of goods sold isbased on the oldest costs and the ending inventory will be the recent costs Below is the illustration of coting methods Inventory on Jan 1 Y230 200RM6000Inventory Purchased during the year 40 300 RM12000Cost of Goods available for sale 70 units RM18000 Note 20 units are sold in Year 2 for RM500 each Total revenue RM100001 This study source was downloaded by 100000859094778 from CourseHero com on 12 29 2022 11 16 46 GMT 06 00 https www coursehero com file 83173619 FSA Tutorial 4 Analyzing Investing Activitiesdoc BBMF3063 Financial Statement AnalysisTutorial 4 Analyzing Investing ActivitiesBeginning Inventory Net Purchase Cost of goods Sold End InvFIFO RM6000RM12000RM4000RM14000LIFORM6000Rm12000RM6000RM12000Sales Cost of goods sold Gross Profit FIFORM10000RM4000RM6000LIFORM10000RM6000RM4000 From the diagram above we can see that using FIFO costing method has higher earning compareto the LIFO costing method This is because using FIFO will sell out the older inventories whichare lower cost Thus the gross profit will be higher 3 Cost for inventory purposes should be determined by the inventory cost flow method best reflecting periodic income Required a Describe the inventory cost flow assumptions of 1 average cost 2 FIFO and 3 LIFO 1 FIFO assumes that the first item purchased is also the first one sold 2 LIFO assumes that the last item purchased is also the first one sold 3 The average cost cost flow assumption tends to yield a mid range cost and therefore also a mid range profit b Discuss management s usual reasons for using LIFO in an inflationary economy Businesses that sell products that rise in price every year benefit from using LIFO When prices are rising a business that uses LIFO can better match their revenues to their latestcosts A business can also save on taxes that would have been accrued under other forms of cost accounting and they can undertake fewer inventory write downs Virtually any industry that faces rising costs can benefit from using LIFO cost accounting For example many supermarkets and pharmacies use LIFO cost accounting because almost every good they stock experiences inflation Many convenience stores especially 2 This study source was downloaded by 100000859094778 from CourseHero com on 12 29 2022 11 16 46 GMT 06 00 https www coursehero com file 83173619 FSA Tutorial 4 Analyzing Investing Activitiesdoc BBMF3063 Financial Statement AnalysisTutorial 4 Analyzing Investing Activitiesthose that carry fuel and tobacco elect to use LIFO because the costs of these products have risen substantially over time c When there is evidence the value of inventory through its disposal in the ordinary courseof business is less than cost what is the accounting treatment What concept justifies this treatment The proper accounting treatment would be the LCM lower of cost or market methodology The concept under which this treatment is justified is conservatism Conservatism holds that when you are in doubt it is best to choose the accounting alternative that will be least likely to overstate assets or income The usage of the LCM accounting treatment demonstrates the concept of conservatism in that when the cost of inventory exceeds its expected benefit a reduction of the inventory to its market valueis a better measure of its expected future benefit 4 Droog Co is a retailer dealing in a single product Beginning inventory at January 1 of this year is zero and operating expenses for this same year are 5 000 The following purchases are made this year Ending inventory at December 31 is 800 units End of year assets excluding inventories amountto 75 000 of which 50 000 of the 75 000 are current Current liabilities amount to 25 000 and long term liabilities equal 10 000 Required 3 This study source was downloaded by 100000859094778 from CourseHero com on 12 29 2022 11 16 46 GMT 06 00 https www coursehero com file 83173619 FSA Tutorial 4 Analyzing Investing Activitiesdoc BBMF3063 Financial Statement AnalysisTutorial 4 Analyzing Investing Activitiesa Determine net income for this year under each of the following inventory methods Assume asales price of 25 per unit and ignore income taxes 1 FIFO 2 LIFO 3 Average costAnswerEnding inventory 800 units total inventory 1000 units sold 1000 units sales price 25 per unitFIFO Sales Cost of Goods Sold Gross Profit 100 x 25 2500 100 x10 1000 1500 300 x 25 7500 300 x 11 3300 4200 600 x 25 15000 600 x 12 72007800 Total 13500 LIFO Sales Cost of Goods Sold Gross Profit 500 x 25 12500 500 x 15 7500 5000 300 x 25 7500 300 x 14 42003300 200 x 25 5000 200 x 12 24002600 Total 10900Average cost Sales Cost of Goods Sold Gross Profit 250001289001211023200 18000 12 89 x 1000 12890b Compute