lOMoARcPSD|11982361 Chapter 6 2 Group Report Financial Econometrics (Xiamen University) StuDocu is not sponsored or endorsed by any college or university Downloaded by Amy C (amylyncua@gmail.com) lOMoARcPSD|11982361 FINANCIAL ACCOUNTING CASE 6-2 Lewis Corporation Case Analysis Group : Members : 2 Carbonell, Rosario Carpio, Nathaniel Zarate, Vic Paulo Date I. : September 30, 2013 TITLE OF THE CASE: Lewis Corporation Downloaded by Amy C (amylyncua@gmail.com) lOMoARcPSD|11982361 II. BACKGROUND OF THE CASE Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are given the information shown in Exhibit 1 on transactions during the year affecting Lewis’s inventory account. (The purchases are in sequence during the year. The company uses a periodic inventory method). Exhibit 1 2009 Beginning balance purchases 184 0 cartons 600 cartons 800 cartons 400 cartons 200 cartons 282 0 cartons Sales $20.0 0 $20.2 5 $21.0 0 $21.2 5 $21.5 0 $34.0 0 2010 Beginning balance purchases 102 0 cartons 700 cartons 700 cartons 700 cartons 100 0 cartons 308 0 cartons Sales $21.5 0 $21.5 0 $22.0 0 $22.2 5 $35.7 5 2011 Beginning balance purchases 104 0 cartons 100 0 cartons 700 cartons 700 cartons Sales 700 cartons 295 cartons Downloaded by Amy C (amylyncua@gmail.com) $22.5 0 $22.7 5 $23.0 0 $23.5 0 $35.7 lOMoARcPSD|11982361 0 III. 5 STATEMENT OF THE PROBLEM 1). Calculate the cost of goods sold and year-end inventory amounts for 2009, 2010, and 2011 using the (a) FIFO, (b) LIFO, and (c) average cost methods. 2). Lewis Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40 percent, calculate the tax savings this would have made for 2009 to 2011. Would you recommend that Lewis make the change? 3). Dollar sales for 2012 are expected to drop by approximately 8 percent, as a recession in Lewis’s market is forecasted to continue at least through the first three quarters of the year. Total sales are forecasted to be 2,700 cartons. Lewis will be unable to raise its selling price from the 2011 level of $35.75. However, costs are expected to increase to $24.00 per carton for the whole year. Due to these cost/price pressures, the corporation wishes to lower its investment in inventory by holding only the essential inventory of 400 cartons at any time during the year. What is the effect of remaining on FIFO, assuming Lewis had adopted FIFO in 2009? What is the effect of remaining on LIFO, assuming Lewis had adopted LIFO in 2009? What method would you recommend now? 4).What is the LIFO reserve in 2009? What is the LIFO reserve in 2010? What is the significance of the LIFO reserve number? How much did the LIFO reserve increase in 2010? What is the significance of this increase? 5). Despite continuing inflation in the United States in the 1980s and the early 1990s many companies continued to use FIFO for all or part of their domestic inventories. Why do you believe this was the case? Downloaded by Amy C (amylyncua@gmail.com) lOMoARcPSD|11982361 IV. ANALYSIS 1. A.) FIFO METHOD Cost of Goods Sold Beginning balance purchases Total Sales Beginning balance purchases Total Sales Beginning balance purchases Total Sales 2009 Unit 1840 600 800 400 200 3840 2820 2010 Unit 1020 700 700 700 1000 4120 3080 2011 Unit 1040 1000 700 700 700 4140 2950 cartons cartons cartons cartons cartons cartons cartons Unit Cost $20.00 $20.25 $21.00 $21.25 $21.50 Unit Ending Inventory 1840 600 380 Total Cost $36,800.00 $12,150.00 $7,980.00 2820 $56,930.00 Cost of Goods Sold Unit 1020 700 700 660 Total Cost $21,620.00 $15,050.00 $15,050.00 $14,520.00 3080 $66,240.00 Cost of Goods Sold Unit 1040 1000 700 210 Total Cost $23,130.00 $22,500.00 $15,925.00 $4,830.00 2950 $66,385.00 Unit 0 0 420 400 200 1020 Total Cost $0.00 $0.00 $8,820.00 $8,500.00 $4,300.00 $21,620.00 $34.00 Unit Cost cartons cartons cartons cartons cartons $21.50 $21.50 $22.00 $22.25 cartons $35.75 cartons cartons cartons cartons cartons Unit Cost $22.24 $22.50 $22.75 $23.00 $23.50 cartons $35.75 B.) LIFO METHOD Downloaded by Amy C (amylyncua@gmail.com) Ending Inventory Unit 0 0 0 40 1000 1040 Ending Inventory Unit 0 0 0 490 700 1190 Total Cost $0.00 $0.00 $0.00 $880.00 $22,250.00 $23,130.00 Total Cost $0.00 $0.00 $0.00 $11,270.00 $16,450.00 $27,720.00 lOMoARcPSD|11982361 Cost of Goods Sold Ending Inventory 2009 Unit 1840 600 800 400 200 3840 2820 Beginning balance purchases Total Sales cartons cartons cartons cartons cartons cartons cartons Unit Cost $20.00 $20.25 $21.00 $21.25 $21.50 cartons cartons cartons cartons cartons Unit Cost $20.00 $21.50 $21.50 $22.00 $22.25 Total Unit 1020 700 700 700 1000 4120 Sales 3080 cartons $35.75 cartons cartons cartons cartons cartons Unit Cost $20.03 $22.50 $22.75 $23.00 $23.50 cartons $35.75 2011 Beginning balance purchases Total Sales Unit 1040 1000 700 700 700 4140 2950 820 600 800 400 200 2820 Total Cost $16,400.00 $12,150.00 $16,800.00 $8,500.00 $4,300.00 $58,150.00 Unit 1020 0 0 0 0 1020 Total Cost $20,400.00 $0.00 $0.00 $0.00 $0.00 $20,400.00 Total Cost $0.00 $14,620.00 $15,050.00 $15,400.00 $22,250.00 $67,320.00 Ending Inventory Unit 1020 20 0 0 0 1040 Total Cost $20,400.00 $430.00 $0.00 $0.00 $0.00 $20,830.00 Total Cost $0.00 $19,125.00 $15,925.00 $16,100.00 $16,450.00 $67,600.00 Ending Inventory Unit 1040 150 0 0 0 1190 Total Cost $20,830.00 $3,375.00 $0.00 $0.00 $0.00 $24,205.00 $34.00 2010 Beginning balance purchases Unit Cost of Goods Sold Unit 0 680 700 700 1000 3080 Cost of Goods Sold Unit Downloaded by Amy C (amylyncua@gmail.com) 0 850 700 700 700 2950 lOMoARcPSD|11982361 C.) AVERAGE COST METHOD Beginning balance purchases Goods Available for sale Sales Ending Inventory Cost of goods sold Beginning balance purchases Goods Available for sale Sales Ending Inventory Cost of goods sold Beginning balance purchases Goods Available for sale Sales Ending Inventory Cost of goods sold Units 2009 1840 600 800 400 200 3840 2820 1020 2820 2010 1020 700 700 700 1000 4120 3080 1040 3080 2011 1040 1000 700 700 700 4140 2950 1190 2950 Unit cost Cost Total cartons cartons cartons cartons cartons cartons cartons cartons cartons $20.00 $20.25 $21.00 $21.25 $21.50 $20.46 $34.00 $20.46 $20.46 cartons cartons cartons cartons cartons cartons cartons cartons cartons $20.46 $20,864.84 $21.50 $15,050.00 $21.50 $15,050.00 $22.00 $15,400.00 $22.25 $22,250.00 $21.51 $88,614.84 $35.75 $110,110.00 $21.51 $22,368.80 $21.51 $66,246.05 cartons cartons cartons cartons cartons cartons cartons cartons cartons $21.51 $22,368.80 $22.50 $22,500.00 $22.75 $15,925.00 $23.00 $16,100.00 $23.50 $16,450.00 $22.55 $93,343.80 $35.75 $105,462.50 $22.55 $26,830.70 $22.55 $66,513.09 2. Downloaded by Amy C (amylyncua@gmail.com) $36,800.00 $12,150.00 $16,800.00 $8,500.00 $4,300.00 $78,550.00 $95,880.00 $20,864.84 $57,685.16 lOMoARcPSD|11982361 FIFO Sales Cost of goods sales Gross Margin Tax (40%) Net Income Savings in TAX Net Income difference 2009 LIFO 95880 56930 38950 15580 23370 95880 58150 37730 15092 22638 488 732 FIFO 2010 LIFO 110110 66240 43870 17548 26322 110110 67320 42790 17116 25674 432 648 2011 FIFO LIFO 105462. 105462. 5 5 66385 67600 39077.5 37862.5 15631 15145 23446.5 22717.5 486 729 We would not recommend Lewis Corporation to switch from FIFO to LIFO even if it has a TAX savings. Only because, the TAX savings we got from changing from FIFO to LIFO would not compensate the Net income difference from the two methods. FIFO has more income than LIFO. Downloaded by Amy C (amylyncua@gmail.com) lOMoARcPSD|11982361 3. FIFO Forecast Ending Inventor y Cost of Goods Sold 2012 Unit Unit Cost Unit Beginning balance 1190 $23.29 1190 Purchases Total 1910 3100 $24.00 1510 Total Cost $27,720.0 0 $36,240.0 0 Sales 2700 2700 $63,960.0 0 Total Cost Unit 0 400 $0.00 $9,600.0 0 LIFO Forecast 2012 Unit 1190 1910 3100 2700 Beginning balance Purchases Total Sales FIFO Unit Cost $20.34 $24.00 Cost of Goods Sold Unit 790 1910 Ending Inventory Total Cost Unit $16,068.87 400 $45,840.00 0 2700 $61,908.87 2009 LIFO FIFO 2010 LIFO Sales 95880 95880 110110 Cost of goods sales 56930 58150 66240 Gross Margin 38950 37730 43870 $8,136.13 2012 - Forecast FIFO FIFO LIFO 9652 110110 105462.5 105462.5 5 96525 6396 67320 66385 67600 0 61908.87 3256 42790 39077.5 37862.5 5 34616.13 Downloaded by Amy C (amylyncua@gmail.com) 2011 LIFO 400 Total Cost $8,136.13 $0.00 lOMoARcPSD|11982361 Tax (40%) 15580 15092 17548 17116 15631 15145 Net Income 23370 22638 26322 25674 23446.5 22717.5 Downloaded by Amy C (amylyncua@gmail.com) 1302 6 1953 9 13846.45 20769.68 lOMoARcPSD|11982361 Since the total sales forecasted for year 2012 is a period of deflation, with FIFO it has lower taxable income and will pay lower taxes than LIFO. For LIFO has higher taxable income and will pay more taxes than FIFO. Therefore, we’ll still recommend FIFO method. 4. LIFO Rsrv FIFO LIFO LIFO Rsrv FIFO LIFO LIFO Rsrv Increase 21620 20400 1220 23130 20830 2300 1080 2009 2010 The significance of the LIFO reserve number was the amount inventory difference as the period goes on. This value must be in the notes to the financial statement to permit the reader to convert the inventory to a FIFO basis. The 1080 increase on 2010 is the amount needed to add to the LIFO inventory amount to convert it to FIFO. 5. V. ALTERNATIVE COURSES OF ACTION VI. RECOMMENDATION VII. CONCLUSION Downloaded by Amy C (amylyncua@gmail.com)
