TWO SHORT PROBLEMS

TWO SHORT ANSWER PROBLEMS

SUPPORTING CALCULATIONS MUST BE PROVIDED

PROBLEM 1

Assume that XYZ Company has no opening inventory. The following purchases of inventory occurred during the year:

Date Purchases (units) Purchase price per unit

Jan. 2 2 $3

Feb. 15 3 $4

March 30 4 $5

July 29 6 $6

Oct. 30 5 $7

Assume XYZ Company sells 8 items on October 31 and uses the FIFO method of inventory valuation. What amount would appear as cost of goods sold on the income statement?

a. $33

b. $53

c. $76

d. $56

e. None of the above. The correct calculation is shown below.

PROBLEM 2

Paul is a day trader. He is interested in the common stock of XYZ Limited. The following data are available for the company:

2012

2013

2014

Dividends paid per share*

$4

$3

$2.50

Dividend yield ratio

5.5%

5.5%

5.5%

Dividend payout ratio

40%

40%

40%

Return on total assets

10%

12%

8%

Return on common stockholders’ equity

8%

14.5%

9%

*There were no changes in common stock outstanding over the three-year period.

Paul would like answers to the following questions:

1. Is the market price of the company’s stock going up or down?

2. Is the company employing financial leverage to the advantage of the common stockholders?