Robert Groff , an equity analyst, is preparing a report on Crux Corp. As part of his report, Groff makes a comparative financial analysis between Crux and its two main competitors, Rolby Corp. and Mikko Inc. Crux and Mikko report under U.S. GAAP and Rolby reports under IFRS. Groff gathers information on Crux, Rolby, and Mikko. Th e relevant financial information he compiles is in Exhibit H. Some information on the industry is in Exhibit I.
a Charges included in cost of goods sold for inventory write-downs. (Th is does not match the change in the inventory valuation allowance because the valuation allowance is reduced to reflect the valuation allowance attached to items sold and increased for additional necessary write-downs.)
To compare the financial performance of the three companies, Groff decides to convert LIFO figures into FIFO figures, and adjust figures to assume no valuation allowance is recognized by any company.
After reading Groff ’s draft report, his supervisor, Rachel Borghi, asks him the following questions:
Question 1: Which company’s gross profit margin would best reflect current costs of the industry?
Question 2: Would Rolby’s valuation method show a higher gross profit margin than Crux’s under an
inflationary, a deflationary, or a stable price scenario?
Question 3: Which group of ratios usually appears more favorable with an inventory write down?
The best answer to Borghi’s Question 3 is:
A. Activity ratios.
B. Solvency ratios.
C. Profitability ratios.