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Merrimack Tractors And Mowers, Inc: Lifo Or Fifo ?

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Merrimack Tractors and Mowers, Inc.: LIFO or FIFO? 1.- Study the financial information for reel mower units that James Colburn prepared for Rick Martino. (Assume that the reel mower units are typical of all classes of inventory at Merrimack). Prepare a pro-forma income statement assuming no changes in accounting policy for 2008, and assuming 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. Sales Quarter Units '000s Unit $ $ '000s 1 10 2,000 20,000 2 10 2,000 20,000 3 10 2,000 20,000 4 10 2,000 20,000 80,000 LIFO Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (CGS) 2008 Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Q1 15 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q2 15 900 13,500 10 1,500 15,000 15 900 13,500 10 1,500 15,000 Q3 15 900 13,500 10 1,600 16,000 15 900 13,500 10 1,600 16,000 Q4 15 900 13,500 10 1,700 17,000 15 900 13,500 10 1,700 17,000 Year 15 900 13,500 40 1,550 62,000 15 900 13,500 40 1,550 62,000

Proforma Income Statement, Year End 2008 LIFO 2007 2008 $ '000s $ '000s Sales 67,000 80,000 CGS 46,000 62,000 Gross Margin 21,000 18,000 Gross Margin % 31% 23% Selling and Admin Exp. 10,000 10,000 Income before taxes 11,000 8,000 Income Tax (35%) 3,850 2,800 Net Income 7,150 5,200 Net Income % 11% 7% 2. How would this change if the unit sales pattern was 10,000; 5,000; 20,000; 5,000 units in the four quartes? Why? Sales Quarter Units '000s Unit $ $ '000s 1 10 2,000 20,000 2 5 2,000 10,000 3 20 2,000 40,000 4 5 2,000 10,000 80,000 LIFO Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (CGS) 2008 Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Q1 15 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q2 15 900 13,500 10 1,500 15,000 20 15 900 13,500 5 1,500 7,500 - 5 1,500 7,500 Q3 20 15 900 13,500 10 1,600 16,000 10 900 9,000 20 5 900 4,500

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11/01/2012 17:59

Merrimack Tractors And Mowers, Inc: Lifo Or Fifo ?

http://www.oppapers.com/print/Merrimack-Tractors-And-Mowers-Inc-...

1,500 7,500 5 1,500 7,500 - 10 1,600 16,000 Q4 10 900 9,000 10 1,700 17,000 15 10 5 1,700 8,500 Year 15 900 13,500 40 1,550 62,000 15

900 1,167

9,000 5 17,500 40

1,700 1,450

8,500 58,000

Proforma Income Statement, Year End 2008 LIFO 2007 2008 2008 $ '000s $ '000s $ '000s Sales 67,000 80,000 80,000 CGS 46,000 62,000 58,000 Gross Margin 21,000 18,000 22,000 Gross Margin % 31% 23% 28% Selling and Admin Exp. 10,000 10,000 10,000 Income before taxes 11,000 8,000 12,000 Income Tax (35%) 3,850 2,800 4,200 Net Income 7,150 5,200 7,800 Net Income % 11% 7% 10% 3. If Merrymack Tractors and Mowers were to adopt FIFO as of january 1, 2008. How would this affect the financial statements (balance Sheets, P&L and cashFlow)? You may assume the 10,000 per quarter of unit sales FIFO Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (CGS) 2008 Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Units '000s Price $ '000s Q1 15 1,267 19,000 10 1,400 14,000 15 5 1,267 6,333 10 1,267 12,667 10 1,400 Q2 15 5 1,267 6,333 10 1,500 15,000 15 5 1,400 7,000 10 5 1,267 6,333 10 1,400 14,000 10 1,500 15,000 5 1,400 7,000 Q3 15 5 1,400 7,000 10 1,600 16,000 15 5 1,500 7,500 10 5 1,400 7,000 10 1,500 15,000 10 1,600 16,000 5 1,500 7,500 Q4 15 5 1,500 7,500 10 1,700 17,000 15 5 1,600 8,000 10 5 1,500 7,500 10 1,600 16,000 10 1,700 17,000 5 1,600 8,000 Year 15 1,267 19,000 40 1,550 62,000 15 1,667 25,000 40 1,400 56,000

Proforma Income Statement, Year End 2008 FIFO (LIFO) LIFO Level LIFO FIFO 2007 2008 2008 2009 $ '000s $ '000s $ '000s $ '000s Sales 67,000 80,000 80,000 80,000 CGS 46,000 62,000 58,000 56,000 Gross Margin 21,000 18,000 22,000 24,000 Gross Margin % 31% 23% 28% 30% Selling and Admin Exp. 10,000 10,000 10,000 10,000 Income before taxes 11,000 8,000 12,000 14,000 Income before taxes % 16% 10% 15% 18% Income Tax (35%) 3,850 2,800 4,200 4,900 Net Income 7,150 5,200 7,800 9,100 Net Income % 11% 7% 10% 11%

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11/01/2012 17:59

Merrimack Tractors And Mowers, Inc: Lifo Or Fifo ?

http://www.oppapers.com/print/Merrimack-Tractors-And-Mowers-Inc-...

Realizando este mtodo se generan mayores ingresos, ya que los costos de las mercaderas de las primeras compras es menor.

4. In the pro-forma income statements that James Colburn prepared for Rick Martino, the costs of reel mower units and transportations were rising for 2007 and 2008. How would Merrimack Mowers and its accounting choices have differed if inventory purchase prices and transportation costs had been stable or falling over the two-year period? (For example, if Merrimack were a computer assembly firm.) Merrimaack antes controlaba sus ventas con los costos de sus ultimas compras, eso ha ocasionado un cambio en su contabilidad. Anteriormente utilizaban el mtodo LIFO (UEPS), que daba lugar a una reduccin de las ganancias al obtener precios mas altos sobre la compra del inventario. El precio de los materiales y de transporte no es fijo, este puede fluctuar, dando lugar al incremento de los costos. 5. What are the purposes of financial reporting? Los estados financiero tienen como finalidad poder comparar las finanzas de la empresa en distintas etapas o anos para tomar mejores desiciones en el presente y futuro. Estos se encargan de dar a conocer los ingresos, egresos y ganancias de la empresa. En el caso Merrimack la variacin de los medleos de evaluacin de inventarios ocasiona una diferencia en los costos de los inventarios. 6. Is James Colburn suggesting to Rick Martino that they should be managing earnings rather than managing the company and its business? Although such changes are clearly permitted by law, do you consider them to be ethical? James Colbum propone realizar cambios utilizando un mtodo distinto para la valuacin de inventarios, pero no creo que sea correcto porque generara confusin, ya que en financieramente se visualizara un aumento en las ganacias, sin mostrar detalles de que esto ocurri solo por un cambio contable, no por una mejor gestin empresarial. 7. Assuming that Rick Martino recommends to his Board of Directors that they should switch from LIFO to FIFO for 2008, do you consider adecuate the following phrases to be seen in footnotes to the financials statements explaining the change Merrimack is making?: a).- .conditions have changed since the new method gives a more accurate picture of company performance No lo considero adecuado, ya que el mtodo no refleja una imagen precisa del rendimiento de la compaa, pues el mtodo suele ser engaoso. b).- we chose to change now because we believe that eventually we will be forced to do so . No importa cuando se hicieran los cambios, el negocio estara funcionando igual. c).- . We are changing our methods of operations, and FIFO better presents our inventory flow and costs Con este metodo se logran mejores ganancias netas, mas alla de presentarse mejor su inventario y sus costos.

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