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  • Merrimack Tractors and Mowers, Inc 1

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    Kshitish
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    The document compares using LIFO and FIFO inventory costing methods for Merrimack Tractors and Mowers for 2008, showing that LIFO results in lower reported income than FIFO due to higher reported cost of goods sold under LIFO. Uneven sales patterns would further decrease income under LIFO but increase it under FIFO compared to level sales each quarter. Changing from LIFO to FIFO inventory costing would increase Merrimack's reported 2008 net income.

    Original Description:

    MBA Accounts -1

    Original Title

    Merrimack Tractors and Mowers , Inc 1 (1)

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    The document compares using LIFO and FIFO inventory costing methods for Merrimack Tractors and Mowers for 2008, showing that LIFO results in lower reported income than FIFO due to higher reported cost of goods sold under LIFO. Uneven sales patterns would further decrease income under LIFO but increase it under FIFO compared to level sales each quarter. Changing from LIFO to FIFO inventory costing would increase Merrimack's reported 2008 net income.

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    © All Rights Reserved
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    40 views12 pages

    Merrimack Tractors and Mowers, Inc 1

    Uploaded by

    Kshitish
    The document compares using LIFO and FIFO inventory costing methods for Merrimack Tractors and Mowers for 2008, showing that LIFO results in lower reported income than FIFO due to higher reported cost of goods sold under LIFO. Uneven sales patterns would further decrease income under LIFO but increase it under FIFO compared to level sales each quarter. Changing from LIFO to FIFO inventory costing would increase Merrimack's reported 2008 net income.

    Copyright:

    © All Rights Reserved
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    of 12

    MERRIMACK TRACTORS AND MOWERS ,

    INC.:
    LIFO OR FIFO?
     Q1—Using LIFO, prepare a pro-forma income statement for
    2008 assuming that the company sells 10,000 units each
    quarter at a price of $ 2,000 per unit with Sales General and
    Administration costs the same as for 2007
    LESS:
    ENDIN
    G
    BEGINNING ADD: INVEN
    2008 INVENTORY PURCHASES   TORY     COST OF GOODS SOLD
    Units VALUE'0 Units VALUE'0 Units VALUE'0 Units VALUE'0
      '000 PRICE 00 '000 PRICE 00 '000 PRICE 00 '000 PRICE 00

    Q1 15 900 13.5 10 1400 14 15 900 13.5 10 1400 14

    Q2 15 900 13.5 10 1500 15 15 900 13.5 10 1500 15

    Q3 15 900 13.5 10 1600 16 15 900 13.5 10 1600 16

    Q4 15 900 13.5 10 1700 17 15 900 13.5 10 1700 17

    YEAR 15 900 13.5 40 1550 62 15 900 13.5 40 1550 62

                             
    INCOME STATEMENT (THOUSANDS OF
    RUPEES)

    2007 (LIFO) 2008(LIFO)

    Sales Rs. 67000 Rs.80,000 (4*10*2)

    Cost of goods sold 46,000 62,000 (from table)

    Gross margin Rs. 21000 Rs.18000

    Selling and admin.exp 10,000 10,000 (assumed)

    Income before taxes Rs. 11000 Rs.8000

    Income taxes (35%) 3,850 2,800

    Net income Rs. 7150 Rs.5200


     Q2—How would this change if the unit sales pattern
    was 10,000, 5,000, 20,000, 5,000 units in the four
    quarters? Why?
    LESS:
    ENDING
    INVENTO
    2008 BEGINNING INVENTORY ADD: PURCHASES   RY     COST OF GOODS SOLD

    VALUE'00 VALUE'00 VALUE'00 VALUE'00


      Units '000 PRICE 0 Units '000 PRICE 0 Units '000 PRICE 0 Units '000 PRICE 0

    Q1 15 900 13.5 10 1400 14 15 900 13.5 10 1400 14

    Q2 15 900 13.5 10 1500 15 15 900 13.5 5 1500 7.5

                  5 1500 7.5      
    15 900 13.5 5 900 4.5

    Q3            

    5
      1500 7.5 10 1600 16 10 900 9 5 1500 7.5
     

                      10 1600 16
     

    Q4           10 900 9     

      10 900 9 10 1700 17 5 1700 8.5 5 1700 8.5

    YEAR 15 900 13.5 40 1550 62 15 1167 17.5 40 1450 58


    INCOME STATEMENT (THOUSANDS OF
    RUPEES)
    2007 (LIFO) 2008(LIFO) 2008(LIFO)

    Level Sales Uneven Sales

    Sales Rs.67000 Rs.80000 Rs.80000

    Cost of goods sold 46,000 62,000 58,000

    Gross margin Rs.21000 Rs.18000 Rs.22000

    Selling and admin.exp 10,000 10,000 10,000

    Income before taxes Rs.11000 Rs.8000 Rs.12000

    Income taxes (35%) 3,850 2,800 4,200

    Net income Rs.7150 Rs.5200 Rs.7800


     Q3—Assuming 10,000 units of sales per quarter,
    what are the effects of using FIFO on the
    financial statements?
    LESS:
    ENDING
    INVENTOR
    2008 BEGINNING INVENTORY ADD: PURCHASES   Y     COST OF GOODS SOLD

      Units '000 PRICE VALUE'000 Units '000 PRICE VALUE'000 Units '000 PRICE VALUE'000 Units '000 PRICE VALUE'000

    Q1 15 1267 19 10 1400 14 5 1267 6.3 10 1267 12.7

                  10 1400 14      

    Q2 5 1267 6.3 10 1500 15 5 1400 7 5 1267 6.3

      10 1400 14       10 1500 15 5 1400 7

    Q3 5 1400 7 10 1600 16 5 1500 7.5 5 1400 7

      10 1500 15       10 1600 16 5 1500 7.5

    Q4 5 1500 7.5 10 1700 17 5 1600 8 5 1500 7.5

      10 1600 16       10 1700 17 5 1600 8

    YEAR 15 1267 19 40 1550 62 15 1667 25 40 1400 56


    INCOME STATEMENT (THOUSANDS OF
    RUPEES)
    2007 (LIFO) 2008(LIFO) 2008(LIFO) 2008 (FIFO)

      Level Sales Uneven Sales

    Sales Rs. 67000 Rs.80000 Rs.80000 Rs.80000

    Cost of goods sold 46,000 62,000 58,000 56,000

    Gross margin Rs. 21000 Rs.18000 Rs.22000 Rs.24000


    Selling and
    admin.exp 10,000 10,000 10,000 10,000

    Income before taxes Rs.11000 Rs.8000 Rs.12000 Rs.14000

    Income taxes (35%) 3,850 2,800 4,200 4,900

    Net income Rs.7150 Rs.5200 Rs.7800 Rs. 9100


    EXHIBIT 1
     Opening Balance on the Account + Increases –
    Decreases = Ending Balance
    In this case, it translates to:
     Beginning Inventory + Purchases – Cost of Goods Sold
    = Ending Inventory
    which becomes (with a little algebraic manipulation)
    Beginning Inventory + Purchases – Ending Inventory =
    Cost of Goods Sold
    EXHIBIT 2

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