Belt Auction

CASE STUDY # 1:Steel Specialties has been in business for 52 years. The company maintains a perpetual?

inventory system, uses a LIFO flow assumption, and ends its fiscal year at December 31. At the year end, the cost of goods sold and inventory are adjusted to reflect periodic LIFO costing procedures. A railroad strike has delayed the arrival of purchases ordered during the past several months of 2001, and Steel Specialties has not been able to replenish its inventories as merchandise is sold. At December 22, 2006 one product appears in the company’s perpetual inventory records at the following unit costs: Purchase Date Quantity Unit Cost Total Cost Nov. 14, 1954 3,000 Rs. 6 Rs. 18,000 Apr. 12, 1955 2,000 8 16,000 Available for sale at Dec. 22, 2001 5,000 Rs. 34,000 Steel Specialties has another 8,000 units of this product on order at the current wholesale cost of Rs. 30 per unit. Due to the railroad strike, however, these units have not yet arrived (the terms of purchase are F.O.B. destination). Steel Specialties also has been an order from a customer who wants to purchase 4,000 units of this product at the retail sales price of Rs. 45 per unit. Steel Specialties intends to make this sale on December 30, regardless of whether the 8,000 units or order arrive by this date. (The 4,000 unit sale will be shipped by truck, F.O.B. shipping point.) Requirements: a) Are the units in inventory really almost 50 years old? Explain. b) Prepare a schedule showing the sales revenue, cost of goods sold, and gross profit that will result from this sale on December 30, assuming that the 80,000 units currently on order (1) arrive before year ends and (2) do not arrive until some time in the following year. In each computation, show the number of units comprising the cost of goods sold and their related per unit costs. c) Comment on the results obtained in the part (b). d) Management should delay this sale by a few days or not? Explain the reasons for your answer. CASE STUDY # 2: It is late summer and National Motors, an auto manufacturer, is facing a financial crisis. A large issue of bonds payable will mature next March, and the company must issue stock or new bonds to raise the money to retire this debt. Unfortunately, profits and cash flows have been declining over recent years. Management fears that if cash flows and profits do not improve in the current year, the company will not be able to raise the capital needed to replace the maturing bonds. Therefore, members of management have made the following proposals to improve the cash flows and profitability that will be reported in the financial statements dated this coming December 31, 2003. 1. Switch from the LIFO method to the FIFO method of valuing inventories. Management estimates that the FIFO method will result in the lower cost of goods sold but in higher income taxes fro the current year. However, the additional income taxes will not actually be paid until early next year. 2. Switch from the 150%-declining –balance method of depreciation to the straightline method and lengthen the useful lives over which assets are depreciated. These changes would be made only for financial reporting purposes, not for income tax purposes. 3. Pressure dealers to increase their inventories-in short, to buy more cars. (The dealerships are independently owned; thus dealers are the customers’ to whom National Motors sells automobiles). Management estimates that this strategy could increase sales for the current year by 5%. However, any additional sales in the current year would be almost entirely offset by fewer sales in the following year. 4. Require dealers to pay for purchases more quickly. Currently, dealers must pay for purchases of autos within 60 days. Management is considering. reducing this period to 30days. 5. Pass up cash discounts offered for prompt payment (that is 2/10, n/30), and do not pay any bills until the final due date. 6. Borrow at current short-term interest rates (about 10%) and use the proceeds to pay off long-term debt bearing an interest rate of 13%. 7. Substitute stock dividends for cash dividends currently paid on capital stock. Requirement: a) Fill in the table given below by indicating, whether the above seven proposals will increase, decrease or have no effect on captions given in the table. Proposals Net Income Cash Flow from Operating activities Cash 1 2 3 4 5 6 7 b) For each of the seven proposals, write a short paragraph explaining the reasoning behind your answer to part a.

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