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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