Assignment questions (not for submission but for self-preparation)

Q1. Describe the situation that Rick Martino and Merrimack are facing.
Q2. Explain the different methods of accounting for inventory.
Q3. Using FIFO, prepare a pro-forma income statement for 2008 assuming that the company sells 10,000
General, administrative and selling costs (GAS costs) the same as 2007.
Q4. How would this change if the unit sales pattern was 10000, 5000, 20000 and 5,000 units in the four q
Q5. Assuming 10,000 units of sales per quarter, what are the effects of using FIFO on the financial statem
Q6. How would the firm’s accounting choices have differed if inventory purchase prices and transportati
hat the company sells 10,000 units each quarter at a price of $2,000 per unit with

0 and 5,000 units in the four quarters respectively? Why?

g FIFO on the financial statements?
chase prices and transportation costs had been stable or falling over the two-year period?
 Merrimack Motors

Exhibit 2 Pro-forma Income Statement, 2007 and 2008 for reel mower units if no change in inventory accounting

2007 (LIFO) 2008 (LIFO)

Units Per Unit Cost Units Per Unit
($ '000)

Beginning Inventory 15,000 900 13,500 15,000 900

Purchases, Quarter 1 10,000 1,000 10,000 10,000 1,400
Purchases, Quarter 2 10,000 1,100 11,000 10,000 1,500
Purchases, Quarter 3 10,000 1,200 12,000 10,000 1,600
Purchases, Quarter 4 10,000 1,300 13,000 10,000 1,700
Available for Sale 55,000 59,500 55,000
Less Sales 40,000 46,000 1.15 40,000
Ending Inventory 15,000 13,500 15,000

Footnote to the Pro-forma Accounts 2007 2008

Total Inventories under the FIFO method 19,000
Less: LIFO Reserve 5,500
Total inventory under the LIFO costflow method 13,500 ?
ge in inventory accounting

2008 (LIFO) Income Statement ($ thousands) 2007 (LIFO) 2008 (LIFO)

Cost Sales $67,000 $80,000
($ '000) Cost of goods sold 46,000
Gross margin 21,000
13,500 Selling and admin. Exp. 10,000
14,000 Income before taxes 11,000 3,850
15,000 Income taxes (35%) 3,850
16,000 Net income 7,150 ?
17,000
75,500

Income Statement ($ thousands) 2007 (FIFO) 2008 (FIFO)

Sales $67,000 $80,000
Cost of goods sold
Gross margin
Selling and admin. Exp.
Income before taxes
Income taxes (35%)
Net income ? ?