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Question: Inverness Steel Corporation is a producer of

Inverness Steel Corporation is a producer of flat-rolled carbon, stainless and electrical steels, and tubular products. The company’s income statement for the 2018 fiscal year reported the following information ($ in millions): Sales ………………………………….. $6,255 Cost of goods sold …………………. 5,190 The company’s balance sheets for 2018 and 2017 included the following information ($ in millions):
Inverness Steel Corporation is a producer of flat-rolled carbon, stainless and electrical steels, and tubular products. The company’s income statement for the 2018 fiscal year reported the following information ($ in millions):
Sales ………………………………….. $6,255
Cost of goods sold …………………. 5,190

The company’s balance sheets for 2018 and 2017 included the following information ($ in millions):


The statement of cash flows reported bad debt expense for 2018 of $8 million. The summary of significant accounting policies included the following notes ($ in millions):
Accounts Receivable (in part)
The allowance for uncollectible accounts was $10 and $7 at December 31, 2018 and 2017, respectively. All sales are on credit.
Inventories
Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured using the last in, first out (LIFO) method. Other inventories are measured principally at average cost and consist mostly of foreign inventories and certain raw materials. If the entire inventory had been valued on an average cost basis, inventory would have been higher by $480 and $350 at the end of 2018 and 2017, respectively.
During 2018, 2017, and 2016, liquidation of LIFO layers generated income of $6, $7, and $25, respectively.

Required:
Using the information provided:
1. Determine the amount of accounts receivable Inverness wrote off during 2018.
2. Calculate the amount of cash collected from customers during 2018.
3. Calculate what cost of goods sold would have been for 2018 if the company had used average cost to value its entire inventory.
4. Calculate the following ratios for 2018:
a. Receivables turnover ratio
b. Inventory turnover ratio
c. Gross profit ratio
5. Explain briefly what caused the income generated by the liquidation of LIFO layers. Assuming an income tax rate of 35%, what was the effect of the liquidation of LIFO layers on cost of goods sold in 2018?
The statement of cash flows reported bad debt expense for 2018 of $8 million. The summary of significant accounting policies included the following notes ($ in millions): Accounts Receivable (in part) The allowance for uncollectible accounts was $10 and $7 at December 31, 2018 and 2017, respectively. All sales are on credit. Inventories Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured using the last in, first out (LIFO) method. Other inventories are measured principally at average cost and consist mostly of foreign inventories and certain raw materials. If the entire inventory had been valued on an average cost basis, inventory would have been higher by $480 and $350 at the end of 2018 and 2017, respectively. During 2018, 2017, and 2016, liquidation of LIFO layers generated income of $6, $7, and $25, respectively. Required: Using the information provided: 1. Determine the amount of accounts receivable Inverness wrote off during 2018. 2. Calculate the amount of cash collected from customers during 2018. 3. Calculate what cost of goods sold would have been for 2018 if the company had used average cost to value its entire inventory. 4. Calculate the following ratios for 2018: a. Receivables turnover ratio b. Inventory turnover ratio c. Gross profit ratio 5. Explain briefly what caused the income generated by the liquidation of LIFO layers. Assuming an income tax rate of 35%, what was the effect of the liquidation of LIFO layers on cost of goods sold in 2018?





Transcribed Image Text:

2018 2017 Current assets: Accounts receivable, net $703 $583 Inventories 880 808


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