JC Penney Company uses LIFO in applying the lower-of-cost-or-market. Recent financial state-ments were used to compile the following information (dollar figures in millions): Average inventory (throughout the year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142Current assets (at year-end) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,652Current liabilities (at year-end) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,249Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,556Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,646Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,910Average time required to collect outstanding receivables (approximate) . . . . . . . . . . . 5 days Instructionsa. Using the information provided, compute the following measures based upon the LIFOmethod:1. Inventory turnover.2. Current ratio (see Chapter 5 for a discussion of this ratio).3. Gross profit rate (see Chapter 6 for a discussion of this statistic).b. Assuming the cost of goods sold would be lower under FIFO, what circumstances must thecompany have encountered to cause this situation? (Were replacement costs, on average, risingor falling?)c. How would you expect these ratios to differ (i.e., what direction) had the company used FIFOinstead of LIFO? d. Explain why the average number of days required by JC Penney to collect its accounts receiv-able is so low. (See Chapter 7 for a discussion of the accounts receivable turnover.)
JC Penney Company uses LIFO in applying the lower-of-cost-or-market. Recent financial state-
ments were used to compile the following information (dollar figures in millions):
Average inventory (throughout the year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142
Current assets (at year-end) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,652
Current liabilities (at year-end) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,249
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,556
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,646
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,910
Average time required to collect outstanding receivables (approximate) . . . . . . . . . . . 5 days
Instructions
a. Using the information provided, compute the following measures based upon the LIFO
method:
1. Inventory turnover.
2.
3. Gross profit rate (see Chapter 6 for a discussion of this statistic).
b. Assuming the cost of goods sold would be lower under FIFO, what circumstances must the
company have encountered to cause this situation? (Were replacement costs, on average, rising
or falling?)
c. How would you expect these ratios to differ (i.e., what direction) had the company used FIFO
instead of LIFO?
d. Explain why the average number of days required by JC Penney to collect its accounts receiv-
able is so low. (See Chapter 7 for a discussion of the accounts receivable turnover.)
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