## Required

- 1. In aIDition to the contribution margin figures already computed, now compute the PV ratio (also known as the CM ratio).
- 2. AID another column to your worksheet and compute the clinics per-visit revenue and costs.
- 3. Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 76.

**CHAPTER 8**

**Assignment Exercise 81: FIFO and LIFO Inventory**

Study the FIFO and LIFO explanations in the chapter.

## Required

- a1. Use the format in Exhibit 81 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80.
- a2. Also compute the cost of goods sold percentage of sales.
- b1. Use the format in Exhibit 82 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions.
- b2. Also compute the cost of goods sold percentage of sales.
- c. Comment on the difference in outcomes.

**Assignment Exercise 82: Inventory Turnover**

Study the Calculating Inventory Turnover portion of the chapter closely, whereby the cost of goods sold divided by the average inventory equals the inventory turnover.

## Required

Compute two inventory turnover calculations as follows:

- 1. Use the LIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.
- 2. Use the FIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.

**Example 8A: Depreciation Concept**

Assume that Metropolis Health System (MHS) purchased equipment for $200,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:

- Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10% salvage value or 20,000 equals 180,000.
- Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years.

Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses *book value*, which is the net amount remaining when cumulative previous depreciation is deducted from the assets cost. The computation is as follows:

- Step 1. Compute the straight-line rate: 1 divided by 10 equals 10%.
- Step 2. Now double the rate (as in
*double-declining method*): 10% times 2 equals 20%. - Step 3. Compute the first years depreciation expense: 200,000 times 20% equals 40,000.
- Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000.
- Step 5. Compute the second years depreciation expense: 160,000 times 20% equals 32,000.
- Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning of the third year of 128,000.
- Continue until the assets salvage or trade-in value has been reached.
- Do not depreciate beyond the salvage or trade-in value.

**Practice Exercise 8I: Depreciation Concept**

Assume that MHS purchased equipment for $600,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

## Required

- 1. Compute the straight-line depreciation for this purchase.
- 2. Compute the double-declining balance depreciation for this purchase.

**Assignment Exercise 83: Depreciation Concept**

Assume that MHS purchased two aIDitional pieces of equipment on April 1 (the first day of its fiscal year), as follows:

- 1. The laboratory equipment cost $300,000 and has an expected life of = years. The salvage value is 5% of cost. No equipment was traded in on this purchase.
- 2. The radiology equipment cost $800,000 and has an expected life of 7 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

## Required

For both pieces of equipment:

- 1. Compute the straight-line depreciation.
- 2. Compute the double-declining balance depreciation.

**Example 8B: Depreciation**

This example shows straight-line depreciation computed at a five-year useful life with no salvage value. Straight-line depreciation is the method commonly used for financing projections and funding proposals.