Problem 12-93A (Algorithmic) Accounting Alternatives and Financial Analysis
Shady Deal Automobile Sales Company has asked your bank for a $100,000 loan to expand its sales facility. Shady Deal provides you with the following data:
| | 2019 | | 2018 | | 2017 |
| Sales revenue | $6,100,000 | | $5,800,000 | | $5,400,000 |
| Net income | 119,000 | 112,000 | 106,000 |
| Ending inventory (FIFO)* | 665,000 | 600,000 | 500,000 |
| Purchases | 5,370,000 | 5,105,000 | 4,860,000 |
| Depreciable assets | 1,240,000 | 1,150,000 | 1,090,000 |
* The 2016 ending inventory was $470,000 (FIFO).
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 Shady Deal has used 5% of depreciable asset cost when computing depreciation expense and that other automobile dealers use 10%. Assume that Shady Deal's effective tax rate is 25% of income before tax. Also assume the following:
| | 2019 | 2018 | 2017 |
| Ending inventory (LIFO)* | $508,000 | $495,000 | $472,500 |
*The 2016 ending inventory was $470,000 (LIFO).
Required:
1. Compute cost of goods sold for 20172019, using both the FIFO and the LIFO methods.
| | Cost of Goods Sold |
| Year | FIFO Method | LIFO Method |
| 2017 | $ | $ |
| 2018 | $ | $ |
| 2019 | $ | $ |
2. Compute depreciation expense for Shady Deal for 20172019, using both 5% and 10% of the cost of depreciable assets.
| | Depreciation Expense |
| Year | 10% | 5% |
| 2017 | $ | $ |
| 2018 | $ | $ |
| 2019 | $ | $ |
3. Recompute Shady Deal's net income for 20172019, using LIFO and 10% depreciation. (Don't forget the tax impact of the increases in cost of goods sold and depreciation expense.) Round calculations and answers to the nearest whole dollar.
| | Net income |
| 2017 | $ |
| 2018 | $ |
| 2019 | $ |
4. Conceptual Connection: Has Shady Deal appeared to materially changed its financial statements by the selection of FIFO (rather than LIFO) and 5% (rather than 10%) depreciation?
