Call II 15 02 21 with Sol

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5 Accounting Finance and Control - Prof. Arena Written test WITH SOLUTIONS Call II - 15th February 2021 Q1_4 POINTS The company LC Ltd is a brake discs manufacturer that produces and sells one type of brakes using a make - to-stock production strategy. The company adopts the FIFO approach for accounting its inventories of raw materials and finished goods. The inventories of finished goods are accounted according to a full manufacturing cost method. The unitary cost of the finished good can be assumed constant during the year. You have the following data as of December 31st, 2020: • Revenues: 2,000 mln€ • Brakes sold: 5,600,000 units • Raw materials purchased: 1,054 mln€ • Raw materials inventories for an overall value of 30 mln€ • Finished goods inventories: 1,200,000 units for an overall value of 355.2 mln€ • Selling, marketing, general & administrative expenses: 200 mln€ • Financial expenses: 300 mln€ • Corporate tax rate: 40% You know also that in December 2020, LC has received from MC Ltd the advanced payment of the 2021 rental fee of a prestigious building (fee: 8 mln€). MC Ltd is renting this building for the first time. Finally, the inventories as of December 31st, 2019 were: • Raw materials inventories for an overall value of 40 mln€ • Finished goods inventories: 1,000,000 units for an overall value of 300 mln€ Based on the available data, it is CORRECT that EBIT (2020) of LC Ltd is around: a) 146.4 mln€ b) 138.4 mln€ c) 128.4 mln€ d) 142.4 mln€ Solution: Revenues = 2,000 mln € Cost of goods sold = 1,000,000 u*300€/u + 4,600,000u*296€/u = 1,661.6 mln€ SGA = 200 mln € EBIT = 138.4 mln€ a) Wrong: it considers the rent as other income which is not in line with the accrual principle b) Correct c) Wrong: it considers the Variation of inventories of raw materials as…