Merrimack Tractors and Mowers - Free Essay Example

Sample details Pages: 3 Words: 801 Downloads: 5 Date added: 2017/09/22 Category Advertising Essay Type Argumentative essay Did you like this example? 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. SalesQuarterUnits 000sUnit $ $ 000s 110 2,000 20,000 210 2,000 20,000 310 2,000 20,000 410 2,000 20,000 80,000 LIFOBeginning Inventory+ Purchases Ending Inventory= Cost of Goods Sold (CGS) 2008Units 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000s Q115 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q215 900 13,500 10 1,500 15,000 15 900 13,500 10 1,500 15,000 Q315 900 13,500 10 1,600 16,000 15 900 13,500 10 1,600 16,000 Q415 900 13,500 10 1,700 17 ,000 15 900 13,500 10 1,700 17,000 Year15 900 13,500 40 1,550 62,000 15 900 13,500 40 1,550 62,000 Proforma Income Statement, Year End 2008 LIFO20072008 $ 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? SalesQuarterUnits 000sUnit $ $ 000s 110 2,000 20,000 25 2,000 10,000 320 2,000 40,000 45 2,000 10,000 80,000 LIFOBeginning Inventory+ Purchases Ending Inventory= Cost of Goods Sold (CGS) 2008Units 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000s Q115 900 13,500 10 1,400 14,000 15 900 13,500 10 1,400 14,000 Q215 900 13,500 10 1,500 15,000 2015 900 13,500 5 1,500 7,500 5 1,500 7,500 Q32015 900 13,500 10 1,600 16,000 10 900 9,000 205 900 4,50 0 5 1,500 7,500 5 1,500 7,500 10 1,600 16,000 Q410 900 9,000 10 1,700 17,000 1510 900 9,000 5 1,700 8,500 5 1,700 8,500 Year15 900 13,500 40 1,550 62,000 15 1,167 17,500 40 1,450 58,000 Proforma Income Statement, Year End 2008 LIFO200720082008 $ 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. 0,000 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 and cashFlow)? You may assume the 10,000 per quarter of unit sales FIFOBeginning Inventory+ Purchases Ending Inventory= Cost of Goods Sold (CGS) 2008Units 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000sUnits 000s Price $ 000s Q115 1,267 19,000 10 1,400 14,000 155 1,267 6,333 10 1,267 12,667 10 1,400 Q2155 1,267 6,333 10 1,500 15,000 155 1,400 7,000 105 1,267 6,333 10 1,400 14,000 10 1,500 15,000 5 1,400 7,000 Q3155 1,400 7,000 10 1,600 16,000 155 1,500 7,500 105 1,400 7,000 10 1,500 15,000 10 1,600 16,000 5 1,500 7,500 Q4155 1,500 7,500 10 1,700 17,000 155 1,600 8,000 105 1,500 7,500 10 1,600 16,000 10 1,700 17,000 5 1,600 8,000 Year15 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 2007200820082009 $ 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% Realizando este metodo se generan mayores ingresos, ya que los costos de las mercaderias de las pr imeras 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 metodo LIFO (UEPS), que daba lugar a una reduccion 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 variacion de los medleos de evaluacion 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 metodo distinto para la valuacion de inventarios, pero no creo que sea correcto porque generaria confusion, ya que en financieramente se visualizaria un aumento en las ganacias, sin mostrar detalles de que esto ocurrio solo por un cambio contable, no por una mejor gestion 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 phrase s 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 metodo no refleja una imagen precisa del rendimiento de la compania, pues el metodo suele ser enganoso. 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 estaria 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. Don’t waste time! 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