The asset side of the 2017 balance sheet for CarMax Inc. is below.
Continued next page
The footnotes to the annual report include the following:
Inventory is primarily comprised of vehicles held for sale or currently undergoing reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts, labor and overhead costs associated with reconditioning vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory.
Required:
a. Does CarMax use the LIFO or the FIFO method of inventory costing? Explain.
b. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?
c. At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute inventory turnover and average days inventory outstanding for both years. Do the two ratios tell the same story? Why or why not?
d. CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017 and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.
e. What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

Question

The asset side of the 2017 balance sheet for CarMax Inc. is below. 
  Continued next page
The footnotes to the annual report include the following:
Inventory is primarily comprised of vehicles held for sale or currently undergoing reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts, labor and overhead costs associated with reconditioning vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory.
Required: 
a. Does CarMax use the LIFO or the FIFO method of inventory costing? Explain.
b. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?
c. At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute inventory turnover and average days inventory outstanding for both years. Do the two ratios tell the same story? Why or why not?
d. CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017 and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.
e. What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

Quizplus · Accepted Answer

The Answer of The asset side of the 2017 balance sheet for CarMax Inc. is below. 
  Continued next page
The footnotes to the annual report include the following:
Inventory is primarily comprised of vehicles held for sale or currently undergoing reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts, labor and overhead costs associated with reconditioning vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory.
Required: 
a. Does CarMax use the LIFO or the FIFO method of inventory costing? Explain.
b. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?
c. At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute inventory turnover and average days inventory outstanding for both years. Do the two ratios tell the same story? Why or why not?
d. CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017 and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.
e. What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

The Asset Side of the 2017 Balance Sheet for CarMax