1

Merrimack Tractors and Mowers, Inc.: LIFO or FIFO?

17

Exhibit 2Units

2007 (LIFO)Per Unit

Cost($'000) Units

2008 (LIFO)

Per UnitCost

($'000)Beginning inventory 15000 900 13500 15000 900 13500Purchases, Quarter 1 10000 1000 10000 10000 1400 14000Purchases, Quarter 2 10000 1100 11000 10000 1500 15000Purchases, Quarter 3 10000 1200 12000 10000 1600 16000Purchases, Quarter 4 10000 1300 13000 10000 1700 17000Available for sale 55000 59500 55000 75500Less Sales 40000 46000 40000Ending Inventory 15000 13500 15000Foot notes to the Pro-Forma Accounts 2007

Total inventories under FIFO 19000Less: LIFO method adjustments -5500 LIFO ReserveTotal inventory 13500Income Statement (000 of $) 2007 (LIFO)Sales 67000 40,000 units @ 10,000 units per quarterCost of goods sold 46000Gross margin 21000Selling and Admin Expenses 10000Income before taxes 11000Income taxes (35%) 3850Net income 7150

Pro-Forma Income Statement, 2007 and 2008 for Reel Mower Units if no Change in Inventory Accounting

42

Inventory Valuation (FIFO)Example

Start with no inventory purchase three items of inventory

on consecutive days for $1, $2, and $3. If one unit sold for inventory for $5

It is the bottom one at $1, resulting in $4 profit

43

Inventory Valuation (LIFO)Example

Start with no inventory purchase three items of inventory on consecutive

days for $1, $2, and $3. If one unit sold for inventory for $5 It is the top

one at $3, resulting in $2 profit

46

2008

Units PriceValue'000 Units Price

Value'000 Units Price

Value'000 Units Price

Value'000

Q1 15000 900 13500 10000 1400 14000 15000 900 13500 10000 1400 14000Q2 15000 900 13500 10000 1500 15000 15000 900 13500 10000 1500 15000Q3 15000 900 13500 10000 1600 16000 15000 900 13500 10000 1600 16000Q4 15000 900 13500 10000 1700 17000 15000 900 13500 10000 1700 17000Year 15000 900 13500 40000 1550 62000 15000 900 13500 40000 1550 62000

2007 (LIFO) 2008(LIFO)67000 80000 (4*10*2)46000 6200021000 1800010000 10000 (Assumed)11000 80003850 28007150 5200

Income taxes (35%)Net income

Cost of goods soldGross marginSelling and admin. exp.Income before taxes

Ending Inventory Cost of Goods Sold

Income Statement (Thousands of Dollars

Sales

Beginning Inventory Purchases

48

Units PriceValue'000 Units Price

Value'000 Units Price

Value'000 Units Price

Value'000

Q1 15000 900 13500 10000 1400 14000 15000 900 13500 10000 1400 1400015000 900 135005000 1500 7500

5000 900 45005000 1500 7500

5000 1500 7500 10000 1600 1600010000 900 90005000 1700 8500

Year 15000 900 13500 40000 1550 62000 15000 1167 17505 40000 1450 58000

2007 (LIFO)2008(LIFO)

Level Sales

2008(LIFO)Uneven Sales

67000 80000 80000 (10000+5000+20000+5000)*246000 62000 5800021000 18000 2200010000 10000 1000011000 8000 120003850 2800 42007150 5200 7800

5000 1700 8500

Income Statement (Thousands of Dollars

13500 10000 1700 17000

2008

Q4 15000 900

Beginning Inventory

16000 15000 900 13500

5000 1500 7500

Q315000 900 13500

10000 1600

13500

Net income

Q2 15000 900

Gross marginSelling and admin. exp.Income before taxes

Purchases Ending Inventory Cost of Goods Sold

Income taxes (35%)

SalesCost of goods sold

10000 1500 15000

51

2008

Units PriceValue'000 Units Price

Value'000 Units Price

Value'000 Units Price

Value'000

5000 1267 633510000 1400 14000

5000 1267 6335 5000 1400 7000 5000 1267 633510000 1400 14000 10000 1500 15000 5000 1400 70005000 1400 7000 5000 1500 7500 5000 1400 7000

10000 1500 15000 10000 1600 16000 5000 1500 75005000 1500 7500 5000 1600 8000 5000 1500 7500

10000 1600 16000 10000 1700 17000 5000 1600 8000Year 15000 1267 19005 40000 1550 62000 15000 1667 25005 40000 1400 56005

2007(LIFO)

2008(LIFO)Level Sales

2008(LIFO)Uneven Sales

2008(FIFO)

67000 80000 80000 8000046000 62000 58000 5600521000 18000 22000 2399510000 10000 10000 1000011000 8000 12000 139953850 2800 4200 4898.257150 5200 7800 9096.75

10000 1600 16000

Q4 10000 1700 17000

15000

19005 10000 1400

Net income

Q1 15000 1267

Income Statement (Thousands of Dollars

Gross marginSelling and admin. exp.Income before taxesIncome taxes (35%)

Q2

SalesCost of goods sold

Beginning Inventory Purchases Ending Inventory Cost of Goods Sold

Q3

14000 10000 1267 12670

10000 1500

53

Units PriceValue'000 Units Price

Value'000 Units Price

Value'000 Units Price

Value'000

Q1 15000 900 13500 10000 1400 14000 15000 900 13500 10000 1400 1400015000 900 135005000 1500 7500

10000 900 90005000 1500 7500

5000 1500 7500 5000 1600 8000Q4 5000 900 4500 5000 900 4500

Year 15000 900 13500 25000 1480 37000 40000 1262.5 50500

2007 (LIFO)2008(LIFO)

Level Sales

2008(LIFO)Uneven Sales

2008(FIFO)

2008(LIFO)Zero

Inventory67000 80000 80000 80000 8000046000 62000 50500 56005 5050021000 18000 29500 23995 2950010000 10000 10000 10000 1000011000 8000 19500 13995 195003850 2800 6825 4898.25 68257150 5200 12675 9096.75 12675

Beginning Inventory Purchases

2008

5000 1600

Q2 15000 900 13500 10000

Q315000 900 13500

Ending Inventory Cost of Goods Sold

1500 15000 1500 75005000

8000 5000 900 4500

Income before taxesIncome taxes (35%)Net income

Income Statement (Thousands of Dollars

SalesCost of goods soldGross marginSelling and admin. exp.

94

Cost of Inventories

Cost to be assigned by using.., FIFO

– Assumption: inventory purchased or produced first is consumed or sold first

Weighted average cost Weighted average of cost at the beginning cost of items

purchased during the period WA may be calculated on periodic basis or as each

additional shipment is received

Formula used should reflect the fairest possible approximation to cost incurred

95

Techniques for Measurement of Cost

Standard cost method Considers normal levels of..,

Consumption of materials and supplies Labor Efficiency and capacity utilization

Regularly reviewed and revised if necessary

Retail method Used

In retail trade When large no. of rapidly changing items having similar margins

Cost = sales value – appropriate gross margin

96

Net Realizable Value

Reduces when.., Become partially or wholly obsolete Declined selling price

Cost of inventories may not be also recoverable if; estimated costs of completion has increased

Written down to net realizable value on item-by-item basis

An assessment of net realizable value is made at each balance sheet date

111

LIFO Layers

112

LIFO and FIFO Inventory TurnoverLIFO and FIFO Inventory Turnover

Inventory turnover = COGS / Average Inv.Inventory turnover = COGS / Average Inv. = FIFO = COGS / Average Inv. = old / new= FIFO = COGS / Average Inv. = old / new = LIFO = COGS / Average Inv. = new / old= LIFO = COGS / Average Inv. = new / old

New inventory turnover = COGS (LIFO) / New inventory turnover = COGS (LIFO) / Average Inventory (FIFO)Average Inventory (FIFO)