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1 August, 10:52

This information is available for the Automotive and Other Operations Divisions of General Motors Corporation for 2006. General Motors uses the LIFO inventory method.

(in millions) 2006

Beginning inventory $13,862

Ending inventory 13,921

LIFO reserve 1,508

Current assets 64,131

Current liabilities 67,822

Cost of goods sold 164,682

Sales 172,927

(a) Calculate the inventory turnover ratio and days in inventory. (Round turnover ratio to 3 decimal places, e. g. 15.250 and days in inventory to 1 decimal place, e. g. 20.5.)

(b) Calculate the current ratio based on inventory as reported using LIFO. (Round answer to 2 decimal places, e. g. 0.55.)

(c) Calculate the current ratio after adjusting for the LIFO reserve. (Round answer to 2 decimal places, e. g. 0.55.)

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  1. 1 August, 13:04
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    A. Inventory turnover ratio = 5.927

    B. Current ratio = 0.95

    C. Current ratio after adjusting for the LIFO reserve = 0.97

    Explanation:

    Requirement A

    We know,

    Inventory turnover ratio = Cost of goods sold : Average inventory

    Given,

    Cost of goods sold = 164,682

    Average inventory = Beginning inventory + Ending inventory

    Average inventory = $13,862 + $13,921

    Average inventory = $27,783

    Putting the values into the formula, we will get

    Inventory turnover ratio = Cost of goods sold : Average inventory

    Inventory turnover ratio = $164,682 : $27,783

    Inventory turnover ratio = 5.927

    We know,

    Days in inventory = $365 : $5.927

    Days in inventory = 61.6 days

    Requirement B

    We know,

    Current ratio = Current asset : Current liabilities

    Given,

    Current asset = $64,131

    Current liabilities = $67,822

    Putting the values into the formula, we can get

    Current ratio = Current asset : Current liabilities

    Current ratio = $64,131 : $67,822

    Current ratio = 0.95

    We know,

    The current ratio shows us how a company pays its current liabilities.

    We assume the inventory is reported in the current asset using the LIFO method.

    Requirement C

    We know,

    Current ratio after adjusting for the LIFO reserve = (Current asset + LIFO reserve) : Current liabilities.

    Given,

    Current asset = $64,131

    LIFO reserve = 1,508

    Current liabilities = $67,822

    Putting the values into the formula, we can get

    Current ratio after adjusting for the LIFO reserve = (Current asset + LIFO reserve) : Current liabilities

    Current ratio after adjusting for the LIFO reserve = ($64,131 + 1,508) : $67,822

    Current ratio after adjusting for the LIFO reserve = 65,639 : $67,822 = 0.97

    Current ratio after adjusting for the LIFO reserve = 0.97
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