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MFE6110 Inventory Valuation Methods - Ohio University

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Question 1. What inventory values would Caterpillar report for 2015, 2016, and 2017 if it had used the FIFO method instead of the LIFO method?

Solution:

In case the Caterpillar report for 2015, 2016, and 2017 used FIFO method instead of the LIFO method the closing value of the inventory in the books of account would be as follows: -

In Millions

 

2015

2016

2017

LIFO

 $ 9,700.00

 $ 8,614.00

 $10,018.00

 

 

 

 

Addition

 $ 2,498.00

 $ 2,139.00

 $ 1,934.00

Subtraction

 $             -  

 $             -  

 $             -  

FIFO

 $12,198.00

 $10,753.00

 $11,952.00

 

 

 

 

(Caterpillar. 2018)

Hence, it is evident that if the FIFO method is applied the inventory value will be over valued and show an inflated value as compared to the actual status in terms with the LIFO Method.

Question 2 What amount would Caterpillar's cost of goods sold for 2016 and 2017 be if it had used the FIFO method instead of the LIFO method?

Solution:

Caterpillar's cost of goods sold for 2016 and 2017 be if it had used the FIFO method instead of the LIFO method

For the Year 2016

Less: Beginning inventory change in case of FIFO Method Used                          $ 2498 million

Add: Ending inventory change in case of FIFO Method Use                        $ 2139 million        

            Impact on COGS                                                                  ($ 359 million)

COGS reported for the year 2016 would equal to                      $ 28044 Million + ($ 359 Million) = $ 27685 Million

For the Year 2017

 Less:   Beginning inventory change in case of FIFO Method Used                          $ 2139 million

Add        : Ending inventory change in case of FIFO Method Use                        $ 1934 million

            Impact on COGS                                                                                 ($ 205 million)

COGS reported for the year 2017 would equal to           $ 31206 Million   + ($ 205 Million) 

= $ 31001 Million

(Caterpillar. 2018)

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Question 3. What net income (profit) would Caterpillar report for 2016 and 2017 if it had used the FIFO method instead of the LIFO method?

Solution:

Net income (profit) would Caterpillar report for 2016 and 2017 if it had used the FIFO method instead of the LIFO method

Loss for the Year                                                                                                 $ 67 Million

Add : Increment Impact on COGS                                                                      $ 359 million

Less Tax Rate 30 %                                                                                            ( $ 107.70 Million)

Net Profit for the year                                                                                            $ 318.30 Million

For the Year 2017

Profit for the Year                                                                                                 $ 754 Million

Less : Increment Impact on COGS                                                                         $ 205 million

Add : Tax Rate 30 %                                                                                            ( $ 61.50 Million)

Net Profit for the year                                                                                             $ 487.50 Million

Question 4 By what amount would Caterpillar's 2016 and 2017 net cash flow from operating activities increase (decrease) if it had used the FIFO method instead of the LIFO method?

Solution:

Caterpillar's 2016 and 2017 net cash flow from operating activities increase (decrease) if it had used the FIFO method instead of the LIFO method will be computed as follows:-

For the Year 2016

Net cash provided for operating activities                                                        $ 5639 Million

Less : Changes in the Net Income Tax Paid                                                      $ 107.70 million

 

Net Change in  cash provided for operating activities                                       $ 5531.30 Million

For the Year 2017

Net cash provided for operating activities                                                        $ 5706 Million

Less : Changes in the Net Income Tax Paid                                                       $ 61.50 million

Net Change in  cash provided for operating activities                                       $ 5644.50 Million

(Caterpillar. 2018)

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Question 5 What is the cumulative amount of income tax savings that Caterpillar has generated through 2017 by using the LIFO method instead of the FIFO method?

Solution:

Income Tax 30 %

Income Tax Saving will be as follow:-

 Tax Saving  =  $ 359 Million * 30 % = $ 107.70 Million  

 

Tax Saving  =  $ 205 Million * 30 % = $ 61.50 Million 

The Net Tax Saving in the Year 2017 = $ 107.70 Million  - $ 61.50 Million  = $ 46. 20 Million

Question 6: What amount would be added to Caterpillar's retained earnings (profit employed in the business) at December 31, 2017 if Caterpillar had used the FIFO method instead of the LIFO method?

Solution:

Caterpillar's retained earnings or the profit employed in the business at December 31, 2017 if change in inventory method was applied

For the Year 2017

LIFO Retained Earning                                                                      $ 26,301 Million                              

Add Change in Inventory after Tax                                                    $ 143.50 Million

FIFO Retained Earning                                                                       $ 26157.50 Million

(Caterpillar. 2018)

Question 7: What would be the change in Caterpillar's cash balance if Caterpillar had used the FIFO method instead of the LIFO method?

Solution:

Cash Balance will reduced as the closing balance of the inventories have increased for all the year from 2015 , 2016 and 2017 in case when the LIFO method is changed to FIFO Method.

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Question 8: Calculate and compare the following for 2017 under the LIFO method and the FIFO method: inventory turnover ratio, days in inventory on hand, gross profit margin, net profit margin, return on assets, current ratio and total liabilities-to-equity ratio.

Solution:

Changes in the 2017 Ratio are computed as follows: -

Particular

Reported current ratio (LIFO)

Adjusted current ratio (FIFO)

Computation

Analysis

Inventory turnover ratio

3.1

2.59

Adjusted Cost of Goods Sold / Inventory

The Ratio has decreased mainly because Inventory value have Increased from 2016 to 2017)

 

 

 

 

 

Days in inventory on hand

140

141

Adjusted Inventory / COGS *365

The cycle days have increased as the closing stock value has increased

 

 

 

 

 

Gross profit margin

10.45%

9.97%

Adjusted Gross Profit divided by revenue

The Ratio has decreased mainly because Inventory value have Increased from 2016 to 2017)

 

 

 

 

 

Net profit margin

1.77%

1.29%

Adjusted Net Profit divided by revenue

The Ratio has decreased mainly because Inventory value have Increased from 2016 to 2017)

 

 

 

 

 

Return on assets

0.98%

0.70%

Total Revenue / Adjusted Assets

The Ratio value has decreased mainly because total assets value has Increased from 2016 to 2017)

 

 

 

 

 

Current ratio

1.35

1.42

Adjusted Current Assets/ Adjusted Current Liabilities

The Ratio has Improved mainly because current assets value has Increased from 2016 to 2017)

 

 

 

 

 

Total liabilities-to-equity ratio.

4.62

4.04

Total Liabilities divided by Adjusted total equity

The Ratio has Improved mainly because profits have Increased from 2016 to 2017)

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