Abdul Mateen 20110226

Sayed Sohaib Ahmad 20110157

Assignment : Merrimack Tractors and Movers

Question 1
COGS (2008) = (10,000*1700) +(10,000*1600) +(10,000*1500) +(10,000*1400) = 62000
Ending inventory in 2008 = 75000-62000 = 13500 (same as 2007)
2007 2008
Sales 67000 80000
COGS - 46000 -62000
Gross margin 21000 18000
Selling and admin expenses -10000 -10000
Income before tax 11000 8000
Tax -3850 -2800
Net income 7150 5200

Question 2
Cost of Good Sold = (10000 *1400) + (5000*1500) + (10000*1600)+ (5000*1500) +
(5000*900) + (5000*1700) = $58,000,000
Performa statement

Sales 80,000
COGS - 58,000
Gross margin 22,000
Selling and admin expenses - 10,000
Income before taxes 12,000
Income taxes - 4,200
Net income 7800

Question 3
2008 FIFO table
Units cost/unit total cost

Beginning Inventory 15000 900 13500

Purhases, Q1 10000 1400 14000
Purhases, Q2 10000 1500 15000
Purhases, Q3 10000 1600 16000
Purhases, Q4 10000 1700 17000
Available for Sale 55000 75500
Less Sales (40000) (50500)
Ending Inventory 15000 25000

Performa statement
Sales 80,000
COGS - 50,500
Gross margin 29,500
Selling and admin expenses - 10,000
Income before taxes 19,500
Income taxes - 6825
Net income 12675

Question 4
 If the prices are stable (remains 900 and doesn’t change) then any of the
method be it LIFO, FIFO or AVCO, our COGS computed would be same.
  If the prices are decreasing, then FIFO will result in higher COGS and
hence less profits and less tax (as compared to LIFO). But at liquidation
both methods will balance out. (the difference would be resolved)

Question 5
The purpose of financial reporting is to provide information about a company’s
performance (income statement and cash flow statement), financial position
(balance sheet) and changes in financial position (statement of changes in equity)
to the users of financial reports (creditors, equity holders, suppliers and other
investors) for making an informed decision about providing resources to the
company

Question 6
Colburn is not suggesting to martino that only earnings should be managed
neglecting the business. He rather advises to manage both effectively. By
changing the method from LIFO to FIFO in an inflationary environment along
with the going concern, it would be more ethical to evaluate the inventory at more
recent prices rather than older ones. Moreover, FIFO results in more tax than
LIFO and with the assumption that the company would operate for foreseeable
future, its better to pay more tax now then delaying it until liquidation (in case of
LIFO).

Question 7

 The company is having positive returns in the business but due to inflation,
the cost of goods sold under LIFO (last in first out) is becoming is so
 higher that we end up with negative returns (although we are having
positive returns in reality). But in FIFO it would be easier to show profits
which would accurately depict the true economic condition of the
company.
 Under LIFO method, the inventory is valued at historical (low) prices
while in FIFO the inventory would be valued at most recent purchase
prices , accurately depicting the value of the inventory.