29 Jun 4. You are CFO of Goforit
Question
4. You are CFO of Goforit, Inc., a wholesale distribution company specializing in emerging technologies. Your CEO is a brilliant marketer, but relies on you to explain issues and choices in accounting and finance. She has heard from other members of a CEO organization to which she belongs that a company’s net income can vary widely depending on which accounting choices are made from the “GAAP menu.”
Assuming the goal is to maximize net income, choose an accounting treatment from each of the following scenarios, and explain to your CEO why the choice will produce the desired effect on reported Net Income for the current year. Include in your answer the effect of the choice on both the income statement and balance sheet.
Required:
a. Goforit carries significant electronics inventory in a competitive environment where prices are actually falling. Which inventory valuation method would you choose—LIFO, FIFO, or average cost? Assume that unit purchases exceed unit sales.
b. Goforit has a large investment in warehouse equipment including conveyor belts, forklifts, and automated packaging systems. Which depreciation method would you choose: Straight line (SL) or double declining balance (DDB)?
5. Please review the following real-world ratios for Johnson & Johnson and Pfizer for the year ended 2012 and address the 2 questions below.
Ratio Name
Johnson & Johnson
Pfizer
Profit margin
16.1%
24.7%
Inventory turnover ratio
3.1
1.7
Average collection period
59.4 days
69.1 days
Cash debt coverage ratio
.27
.16
Debt to Total assets
46.6%
127.5%
Required:
1) Please explain the meaning of each of the Pfizer ratios above.
2) Please state which company performed better for each ratio.
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