FIFO
Chapter2
Case 2--3b
(1) The tonnage-of-production method helps Canada steels has a good matching of depreciation expense against revenue. Unit-of-production method makes depreciation a variable. A switch to straight-line cannot eliminate the deferred tax liability because accelerated methods make a difference. In addition, Canada Steel should not attempt to pay the liability because it is a loan, which is interest free.
(2) LIFO can reduce taxes and increase cash flow. Inflation declines in recession, but it does not mean its recurrence is impossible. A return to FIFO would relinquish the tax savings. The quality of earnings to be affected adversely by the lack of consistency in inventory method. The $4 million upward adjustment in working capital is a result of increasing the inventory account.
(3) The change of inventory will enable Canada Steel to face the smallest current ratio requirement but the stock repurchase program should not be recommended because the proposed repurchase price of $100 per share is more than the book value. In addition, the potential dividend savings are outweighed by interest costs of $118,000 to finance the purchase.
Chapter 3
Exercise 3-12
a. Purchasing its own shares means the payment of dividends. In the case of dividends, all shareholders are receiving cash in a proportionate manner. In the case of share repurchases, only selected shareholders can receive cash from the company.
b. Managers will prefer to purchase its own company’s shares because it s enhance the financial performance measures and return on shareholders equity.
c. Investors are taxed on dividends received from the company. The tax rate on dividends is very high. Investors also are taxed on gains on the sale of shares that’s why investors often would prefer that companies buy back shares rather than pay a dividend. Investors that would like to reduce their investment in the company can choose to do so by selling
Case 2--3b
(1) The tonnage-of-production method helps Canada steels has a good matching of depreciation expense against revenue. Unit-of-production method makes depreciation a variable. A switch to straight-line cannot eliminate the deferred tax liability because accelerated methods make a difference. In addition, Canada Steel should not attempt to pay the liability because it is a loan, which is interest free.
(2) LIFO can reduce taxes and increase cash flow. Inflation declines in recession, but it does not mean its recurrence is impossible. A return to FIFO would relinquish the tax savings. The quality of earnings to be affected adversely by the lack of consistency in inventory method. The $4 million upward adjustment in working capital is a result of increasing the inventory account.
(3) The change of inventory will enable Canada Steel to face the smallest current ratio requirement but the stock repurchase program should not be recommended because the proposed repurchase price of $100 per share is more than the book value. In addition, the potential dividend savings are outweighed by interest costs of $118,000 to finance the purchase.
Chapter 3
Exercise 3-12
a. Purchasing its own shares means the payment of dividends. In the case of dividends, all shareholders are receiving cash in a proportionate manner. In the case of share repurchases, only selected shareholders can receive cash from the company.
b. Managers will prefer to purchase its own company’s shares because it s enhance the financial performance measures and return on shareholders equity.
c. Investors are taxed on dividends received from the company. The tax rate on dividends is very high. Investors also are taxed on gains on the sale of shares that’s why investors often would prefer that companies buy back shares rather than pay a dividend. Investors that would like to reduce their investment in the company can choose to do so by selling