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Case 1: 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 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 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.

Beginning Inventory Purhases, Q1 Purhases, Q2 Purhases, Q3 Purhases, Q4 Available for Sale Less Sales Ending Inventory

Units 15000 10000 10000 10000 10000 55000 40000 15000

2007 (LIFO) Per Unit Cost ($'000) 900 13500 1000 10000 1100 11000 1200 12000 1300 13000 59500 46000 13500

Units 15000 10000 10000 10000 10000 55000 40000 15000

2008 (LIFO) Per Unit Cost ($'000) 900 13500 1400 14000 1500 15000 1600 16000 1700 17000 75500 62000 13500

Income Statement Sales Cost of goods sold Gross margin Selling and admin exp Income before taxes Income taxes (35%) Net Income

2007 (LIFO) ($'000) 2008 (LIFO) ($'000) 67,000 80,000 46,000 62,000 21,000 18,000 10,000 10,000 11,000 8,000 3,850 2,800 7,150 5,200

2.

How would this change if the unit sales pattern was 10,000, 5,000, 20,000, 5,000 units in the four quarters? Why? (assume inventory count is done every quarter) Cost of Good Sold = $(10000 x 1400) + (5000 x 1500) + [(10000 x 1600) + (5000 x 1500) + (5000 x 900)] + (5000 x 1700) = $58,000,000 Income Statement Sales Cost of goods sold Gross margin Selling and admin exp Income before taxes Income taxes (35%) Net Income

2008 (LIFO) ($'000) 80,000 58,000 22,000 10,000 12,000 4,200 7,800

3.

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.

Beginning Inventory Purhases, Q1 Purhases, Q2 Purhases, Q3 Purhases, Q4 Available for Sale Less Sales Ending Inventory

Units 15000 10000 10000 10000 10000 55000 40000 15000

2008 (FIFO) Cost Per Unit ($'000) 900 13500 1400 14000 1500 15000 1600 16000 1700 17000 75500 50500 25000

Income Statement 2008 (FIFO) ($'000) Sales Cost of goods sold

80,000 50,500

Gross margin Selling and admin exp Income before taxes Income taxes (35%) Net Income

29,500 10,000 19,500 6,825 12,675