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Merrimack Tractors and Mowers, Inc.

:
LIFO or FIFO?

Pro-Forma Income Statement, 2007 and 2008 for Reel Mower Units if no Change in Inventory Accounting
2008
2007 (LIFO)
Cost
(LIFO)
Cost
Units
Per Unit
($'000)
Units Per Unit ($'000)
Beginning inventory
15000
900
13500
15000
900
13500
Purchases, Quarter 1
10000
1000
10000
10000
1400
14000
Purchases, Quarter 2
10000
1100
11000
10000
1500
15000
Purchases, Quarter 3
10000
1200
12000
10000
1600
16000
Purchases, Quarter 4
10000
1300
13000
10000
1700
17000
Available for sale
55000
59500
55000
75500
Less Sales
40000
46000
40000
Ending Inventory
15000
13500
15000
Foot notes to the Pro-Forma Accounts
2007
Total inventories under FIFO
19000
Less: LIFO method adjustments
-5500 LIFO Reserve
Total inventory
13500
Income Statement (000 of $)
2007 (LIFO)
Sales
67000 40,000 units @ 10,000 units per quarter
Cost of goods sold
46000
Gross margin
21000
Selling and Admin Expenses
10000
Income before taxes
11000
Income taxes (35%)
3850
Net income
7150

Exhibit 2

17

Inventory Valuation (FIFO)


Example

42

Start with no inventory purchase three items of inventory


on consecutive days for $1, $2, and $3. If one unit sold for inventory for $5
It is the bottom one at $1, resulting in $4 profit

Inventory Valuation (LIFO)


Example

43

Start with no inventory purchase three items of inventory on consecutive


days for $1, $2, and $3. If one unit sold for inventory for $5 It is the top
one at $3, resulting in $2 profit

2008

Beginning Inventory
Purchases
Value
Value
Units
Price
'000 Units Price '000
Q1
15000
900
13500 10000 1400 14000
Q2
15000
900
13500 10000 1500 15000
Q3
15000
900
13500 10000 1600 16000
Q4
15000
900
13500 10000 1700 17000
Year
15000
900
13500 40000 1550 62000
Income Statement (Thousands of Dollars
2007 (LIFO) 2008(LIFO)
Sales
67000
80000 (4*10*2)
Cost of goods sold
46000
62000
Gross margin
21000
18000
Selling and admin. exp.
10000
10000 (Assumed)
Income before taxes
11000
8000
Income taxes (35%)
3850
2800
Net income
7150
5200

46

Ending Inventory Cost of Goods Sold


Value
Value
Units Price '000 Units Price '000
15000 900 13500 10000 1400 14000
15000 900 13500 10000 1500 15000
15000 900 13500 10000 1600 16000
15000 900 13500 10000 1700 17000
15000 900 13500 40000 1550 62000

Q2

15000

900

13500

Ending Inventory
Value
Value
Units
Price '000 Units Price '000
10000 1400 14000 15000 900 13500
15000 900 13500
10000
1500 15000 5000 1500
7500

Q3

15000
5000

900
1500

13500
7500

10000

2008
Q1

Q4
Year

Beginning Inventory
Value
Units
Price
'000
15000
900
13500

Purchases

1600

16000 15000 900


10000 900
10000
1700 17000 5000 1700
40000 1550 62000 15000 1167

15000
900
13500
15000
900
13500
Income Statement (Thousands of Dollars
2008(LIFO)
2008(LIFO)
Uneven
2007 (LIFO) Level Sales
Sales
Sales
67000
80000
80000 (10000+5000+20000+5000)*2
Cost of goods sold
46000
62000
58000
Gross margin
21000
18000
22000
Selling and admin. exp.
10000
10000
10000
Income before taxes
11000
8000
12000
Income taxes (35%)
3850
2800
4200
Net income
7150
5200
7800

48

Cost of Goods Sold


Value
Units Price '000
10000 1400 14000

5000 1500 7500


5000
900 4500
5000 1500 7500
13500 10000 1600 16000
9000
8500 5000 1700 8500
17505 40000 1450 58000

2008

Q1

Beginning Inventory
Value
Units Price
'000

Purchases
Units

15000 1267
19005
10000
5000 1267
6335
Q2
10000 1400
14000
10000
5000 1400
7000
Q3
10000 1500
15000
10000
5000 1500
7500
Q4
10000 1600
16000
10000
Year
15000 1267
19005
40000
Income Statement (Thousands of Dollars
2007 2008(LIFO) 2008(LIFO)
(LIFO) Level Sales Uneven Sales
Sales
67000
80000
80000
Cost of goods sold
46000
62000
58000
Gross margin
21000
18000
22000
Selling and admin. exp. 10000
10000
10000
Income before taxes
11000
8000
12000
Income taxes (35%)
3850
2800
4200
Net income
7150
5200
7800

51

Price

Value
'000

1400 14000
1500 15000
1600 16000
1700 17000
1550 62000
2008
(FIFO)
80000
56005
23995
10000
13995
4898.25
9096.75

Ending Inventory
Value
Units Price '000
5000 1267 6335
10000 1400 14000
5000 1400 7000
10000 1500 15000
5000 1500 7500
10000 1600 16000
5000 1600 8000
10000 1700 17000
15000 1667 25005

Cost of Goods Sold


Value
Units Price '000
10000
5000
5000
5000
5000
5000
5000
40000

1267 12670
1267 6335
1400 7000
1400 7000
1500 7500
1500 7500
1600 8000
1400 56005

Beginning Inventory
Value
2008
Units
Price
'000
Q1 15000
900
13500
Q2

15000

900

13500

Purchases
Value
Units
Price
'000
10000
1400
14000
10000

15000
900
13500
Q3
5000
1500
7500
5000
Q4
5000
900
4500
Year 15000
900
13500
25000
Income Statement (Thousands of Dollars
2008(LIFO)
2008(LIFO) Uneven
2007 (LIFO) Level Sales
Sales
Sales
67000
80000
80000
Cost of goods sold
46000
62000
50500
Gross margin
21000
18000
29500
Selling and admin. exp.
10000
10000
10000
Income before taxes
11000
8000
19500
Income taxes (35%)
3850
2800
6825
Net income
7150
5200
12675

53

1500

15000

1600

8000

1480

37000

2008(LIFO)
2008
Zero
(FIFO) Inventory
80000
80000
56005
50500
23995
29500
10000
10000
13995
19500
4898.25
6825
9096.75
12675

Ending Inventory Cost of Goods Sold


Value
Value
Units Price '000 Units Price '000
15000 900 13500 10000 1400 14000
15000 900 13500
5000 1500 7500 5000 1500 7500
10000 900 9000
5000 1500 7500
5000 900 4500 5000 1600 8000
5000 900 4500
40000 1262.5 50500

Cost of Inventories

Cost to be assigned by using..,

FIFO

Assumption: inventory purchased or produced first is


consumed or sold first

Weighted average cost

94

Weighted average of cost at the beginning cost of items


purchased during the period
WA may be calculated on periodic basis or as each
additional shipment is received

Formula used should reflect the fairest possible


approximation to cost incurred

Techniques for Measurement of Cost

Standard cost method

Considers normal levels of..,

Regularly reviewed and revised if necessary

Retail method

Used

95

Consumption of materials and supplies


Labor
Efficiency and capacity utilization

In retail trade
When large no. of rapidly changing items having similar margins

Cost = sales value appropriate gross margin

Net Realizable Value

Reduces when..,

96

Become partially or wholly obsolete


Declined selling price

Cost of inventories may not be also recoverable if;


estimated costs of completion has increased
Written down to net realizable value on item-by-item
basis
An assessment of net realizable value is made at each
balance sheet date

LIFO Layers

11
1

LIFO and FIFO Inventory Turnover

Inventory turnover = COGS / Average Inv.

11
2

= FIFO = COGS / Average Inv. = old / new


= LIFO = COGS / Average Inv. = new / old

New inventory turnover = COGS (LIFO) /


Average Inventory (FIFO)