Problem 5-25B Using ratios to make comparisons
The following accounting information pertains to Mobile and Casper companies. The only difference between the two companies is that Mobile uses FIFO, while Casper uses LIFO.
| Mobile Co. | Casper Co. | |
|---|---|---|
| Cash | $70,000 | $70,000 |
| Accounts receivable | $230,000 | $230,000 |
| Merchandise inventory | $220,000 | $190,000 |
| Accounts payable | $210,000 | $210,000 |
| Cost of goods sold | $1,350,000 | $1,380,000 |
| Building | $300,000 | $300,000 |
| Sales | $1,800,000 | $1,800,000 |
Required
a. Compute the gross margin percentage for each company and identify the company that appears to be charging the higher prices in relation to its cost.
b. For each company, compute the inventory turnover ratio and the average days to sell inventory. Identify the company that appears to be incurring the higher financing cost.
c. Explain why a company with the lower gross margin percentage needs to have a higher inventory turnover ratio assuming a period of inflation.
Dr. Eve Carter PhD, Applied Mathematics
Senior lecturer at University. 12+ years tutoring algebra and calculus..
Senior lecturer at University. 12+ years tutoring algebra and calculus..
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