Question

Exhibit 2 Pro-forma Income Statement, 2007 and 2008 for reel mower units if no change in Inventory Accounting Units 2007 (LIFO) Per Unit Units 2008 (LIFO) Per Unit Beginning Inventory Purchases, Quarter 1 Purchases, Quarter 2 Purchases, Quarter 3 Purchases, Quarter 4 Available for Sale Less Sales Ending Inventory 15,000 10,000 10,000 10,000 10,000 55,000 40,000 15,000 900 1,000 1,100 1.200 1,300 Cost (S'000) 13,500 10,000 11,000 12,000 13,000 59,500 46,000 13,500 15,000 10,000 10,000 10,000 10,000 55,000 40,000 15,000 900 1,400 1,500 1,600 1,700 Cost ($'000) 13,500 14,000 15,000 16.000 17,000 75,500 2007 19,000 Footnote to the Pro-forma Accounts Total Inventories under the first-in, first-out ("FIFO") method Less: Last-in, first-out method ("LIFO") adjustmenta Total Inventory (5,500) 13,500 Income Statement (thousands of dollars) Salesb Cost of goods sold Gross margin Selling and admin. exp. Income before taxes Income taxes (35%) Net income 2007 (LIFO) $67,000 46,000 $21,000 10,000 $11,000 3,850 $7,150 a This amount is commonly referred to as the LIFO Reserve. b Sales of 40,000 units occurred at a rate of 10,000 units in each quarter during 2007.

1. If Merrimack Tractors and Mowers were to adopt FIFO as of January 1, 2008, how would this affect the financial statements (Balance sheets, Income statements, and Cash flow)? You may assume the 10,000 per quarter of unite sales for 2008. You need to consider the fact that if Merrimack elects to change from LIFO to FIFO, the inventory will have to be adjusted to what it would have been using FIFO all along (use Footnote to the Pro-forma Accounts).

Answer 1

Ans:

If Merrimack Tractors and Mowers were to adopt FIFO as January 1, 2008, how would this affect the financial statements (Balance Sheets and Income Statement). You may assume the 10,000 per quarter of unit sales for 2008

Cost of Goods Sold-

Q1: (10000 * $900) =$9000000

Q2: (5000 * $900) + (5000 * $1400) =$11500000

Q3: (5000 * $1400) + (5000 * $1500) =$14500000

Q4: (5000 * $1500) + (5000 * $1600) =$15500000

Cost of Goods Sold = $9000000+$11500000+$14500000+$15500000 =$50500000

Income Statement:

	2008 (FIFO) ($'000)
Sales	$80000
Less: Cost of goods sold	($50500)
Gross Margin	$29500
Less: Seling and administration expenses	($10000)
Income before taxes	$19500
Less: Taxes @ 35%	($6825)
Net Income	$12675