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in.wbn.outs.040 Converting LIFO to FIFO, recording related entries, and identifying
their financial-statement effects (Harley Davidson)
This exercise asks you to use Harley Davidson Company’s disclosures to convert LIFO
numbers reported by the company to FIFO, record related entries, and determine their
financial-statement effects. The entries should be recorded using the accounts on page
4. Pages 5-9 report HD’s financial statements and an excerpt from HD’s fiscal 2012 10K.
Part I: Convert reported LIFO numbers to FIFO
Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
Required
(a) Assuming a tax rate of 35% for all relevant years, complete the following table:
LIFO
FIFO
Income statement: "Revenue: Motorcycles and related
products" for the year ended December 31, 2012
$4,942,582
$4,942,582
Income statement: "Motorcycles and related products cost of
good sold" for the year ended December 31, 2012
$3,222,394
$3,220,032
Income statement: "Net income (loss)" for the year ended
December 31, 2012
$623,925
$625,460
Balance sheet: "Inventories" at December 31, 2012
$393,524
$439,413
$7,306,424
$7,336,252
Operating section of cash Flow Statement (Note 2):
"Inventories" for the year ended December 31, 2012
$21,459
$19,097
Ratio: Motorcycles and related products "Gross margin
percentage" for the year ended December 31, 2012 ((revenue cost of sales)/revenue)
34.80%
34.85%
Ratio: Motorcycles and related products "Inventory turnover" for
the year ended December 31, 2012 (cost of sales/average
inventories)
7.94
7.15
Ratio: "Return on equity" for the year ended December 31, 2012
(net income /average owners' equity)
25.07%
24.78%
Tax savings: Cumulative tax savings from having used LIFO
rather than FIFO for all past years, as of December 31, 2012
$16,061
Balance sheet: "Retained earnings" at December 31, 2012
Tax savings: Tax savings (cost) from having used LIFO rather
than FIFO during the year ended December 31, 2012
$827
LIFO reserve at year end
$45,889
$43,527
(LIFO reserve at year end) * (tax rate)
$16,061
$15,234
(LIFO reserve at year end) * (1-tax rate)
$29,828
$28,293
2012
Increase (decrease) in LIFO reserve
(Increase (decrease) in LIFO reserve)* (tax rate)
(Increase (decrease) in LIFO reserve)* (1-tax rate)
2011
$2,362
$827
$1,535
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2
NAVIGATING ACCOUNTING®
Part II: Record Entries
Simplifying Assumptions
■
Although HD uses LIFO for financial and tax reporting, we will assume HD (like
most companies): (1) uses FIFO to record day-to-day operating entries that affect
inventories such as purchasing materials and recognizing FIFO cost of products sold
and (2) records an entry at the end of the reporting period to adjust FIFO inventories to LIFO (using a LIFO reserve contra asset) and FIFO cost of products sold
to LIFO cost of products sold. (This approach allows HD to use FIFO numbers for
operating decisions and still get the tax breaks provided by LIFO).
■
Two costs are recorded to LIFO cost of products sold: (1)FIFO cost of products sold
and (2) the adjustment needed to convert FIFO cost of products sold to LIFO cost of
product sold.
■
Assume all costs recorded to LIFO cost of products sold were previously recorded in
inventory and thus there were no delivery costs or other costs recorded directly to
cost of products sold.
Required
(b) Record a journal entry that summarizes the entries HD recorded during the year
ended December 31, 2012 (fiscal 2012) to recognize FIFO cost of products sold.
Write your entry in the space below using the accounts on page 4.
HD's fiscal 2012 entry to recognize FIFO cost of motorcylces and related
products sold
Debit
LIFO cost of products sold
Finished goods inventories -- FIFO
Credit
$3,220,032
$3,220,032
Reported LIFO cost of sales for fiscal 2012
$3,222,394
Increase (decrease) in LIFO reserve for fiscal 2012
FIFO cost of products sold for fiscal 2012
$2,362
$3,220,032
(c) Record a journal entry that summarizes the entries HD recorded during the year
ended December 31, 2012 (fiscal 2012) to adjust FIFO cost of products sold to
LIFO cost of products sold.
Write your entry in the space below using the accounts on page 4.
HD's fiscal 2012 entry to adjust FIFO cost of products sold to LIFO
Debit
LIFO cost of products sold
LIFO reserve
Credit
$2,362
$2,362
Reported LIFO cost of sales for fiscal 2012
$3,222,394
Increase (decrease) in LIFO reserve for fiscal 2012
FIFO cost of products sold for fiscal 2012
$2,362
$3,220,032
Part III: Financial-Statement Effects of Entries
Required
For the entry you recorded in Part I, complete the related table identifying the HD financial statement line items that would have been directly affected (and the direction of the
effects) during the year ended December 31, 2012.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
3
EXERCISE
Note: HD reports a single line item for operating activities on the statement of cash flows and provides the
detailed information that would normally be reported on the SCF in Note 2. The tables you are to complete
below ask you to determine how the operating section in Note 2 is affected by entries, rather than the SCF.
Guidance:
(1) Determine the appropriate line item(s) affected using HD’s financial statements and footnote information on pages 5-9. For example, write “cash and cash equivalents” rather than “cash” because this is on
HD’s balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for events affecting
income. Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example, don’t report “net earnings” on the income statement. However, net earnings is NOT a total on the statement of shareholders’
equity.
(4) Three or four lines were included below for each statement, but you may need none or more than one
line. Write “NONE” if no line item is effected on the statement.
(5) Indicate if the effect(s) of the entries associated with the event increased or decreased the line item. Put
an X in the appropriate column if the above event increases or decreases that line item. Be sure to mark
only one box in each statement’s row. NOTE: If a reported negative number changes from -2 to -3, it
decreases; if it changes from - 2 to - 1, it increases.
(d) Fiscal 2012 FIFO cost of products sold for motorcycles and related products:
HD's fiscal 2012 entry to recognize FIFO cost of motorcylces and related products sold
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
Inventories
X
Retained earnings
X
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Line Items
Increases
Decreases
X
Net income
Line Items
Increases
Decreases
X
Motorcycles and related products cost of goods sold
OPERATING SECTION OF STATEMENT OF CASH FLOWS (Note 2)
Line Items
Increases
Decreases
X
Net income (loss)
X
Inventories
(e) Adjusting fiscal 2012 FIFO cost of products sold to LIFO:
HD's fiscal 2012 entry to adjust FIFO cost of products sold to LIFO
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
Inventories
X
Retained earnings
X
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Line Items
Increases
Decreases
Net income
X
Line Items
Motorcycles and related products cost of goods sold
Decreases
X
OPERATING SECTION OF STATEMENT OF CASH FLOWS (Note 2)
Line Items
Increases
Decreases
X
Net income (loss)
Inventories
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Increases
X
4
NAVIGATING ACCOUNTING®
Chart of Accounts
ASSETS
Current
Cash
C
Inventories (this is a title, not an account)
Materials inventories -- FIFO
Minv
Work in process -- FIFO
WIP
Finished goods inventories -- FIFO
FGI
LIFO reserve
LR
Segregated inventories: deferred revenue
SIdr
Prepaid expenses
PrEx
Short-term investments
Stin
Trade receivables, net (this is a title, not an account)
Trade receivables: gross
Trgr
Trade receivables: allowance for doubtful accounts
Trall
Noncurrent
Property, plant, and equipment (this is a title, not an account)
HcPPE PP&E historical cost
AcDep PP&E accumulated depreciation
Eqinv Equity and other investments
Goodwill
Gdw
LIABILITIES
Current
Accounts payable
AP
Accrued liabilities (this is a title, not an account)
Accrued liabilities: warranty and recalls
Alwr
Alcom Accrued liabilities: compensation and wages
Aloth Accrued liabilities: other
Dividends payable
DP
Short-term debt
STD
Noncurrent
Long-term debt
LTD
OLTL Other long-term liabilities
OWNERS' EQUITY
Permanent
AOCI
APIC
CS
RE
Accumulated other comprehensive income
Additional paid-in capital
Common stock par value
Retained earnings
Net income
Bdexp
Cops
DepEx
Ginvs
Gimp
IncS
Intinc
PPEg
PPEl
ResEx
Rev
SG&A
Bad debt expense
LIFO cost of products sold
Depreciation expense
Gain on sale of investments
Goodwill impairment
Income summary
Interest income
Gain on sale of PP&E
Loss on sale of PP&E
Restructuring charge
Net revenues
Selling, general, and administrative expense
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
5
EXERCISE
HARLEY-DAVIDSON, INC
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2011
(In thousands, except for share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Restricted finance receivables held by variable interest entities, net
Inventories
Restricted cash
Deferred income taxes
Other current assets
Total current assets
Finance receivables, net
Property, plant and equipment, net
Goodwill
Deferred income taxes
Other long-term assets
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term debt
Pension liability
Postretirement healthcare liability
Other long-term liabilities
Commitments and contingencies (Note 17)
Shareholders equity:
Series A Junior participating preferred stock, none issued
Common stock, 339,107,230 and 338,260,456 shares issued in 2011 and
2010, respectively
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Less
Treasury stock (108,566,699 and 102,739,587 shares in 2011 and 2010,
respectively), at cost
Total shareholders equity
2012
2011
$1,068,138
135,634
230,079
$1,526,950
153,380
219,039
393,524
188,008
110,853
181,655
4,050,936
4,038,807
815,464
29,530
171,845
64,191
$9,170,773
418,006
229,655
132,331
102,378
4,542,206
4,026,214
809,459
29,081
202,439
64,765
$9,674,164
257,386
513,591
294,943
437,162
1,503,082
4,370,544
330,294
278,062
131,167
255,713
564,172
838,486
1,040,247
2,698,618
3,843,886
302,483
268,582
140,339
3,413
1,066,069
7,306,424
(607,678)
7,768,228
3,391
968,392
6,824,180
(476,733)
7,319,230
(5,210,604)
2,557,624
$9,170,773
(4,898,974)
2,420,256
$9,674,164
See accompanying notes
Harley-Davidson's 2012 10K, Page 56
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
6
NAVIGATING ACCOUNTING®
HARLEY-DAVIDSON INC
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1012, 2011 and 2010
(In thousands, except per share amounts)
Revenue:
Motorcycles and related products
Financial services
Total revenue
Costs and expenses:
Motorcycles and related products cost of goods sold
Financial services interest expense
Financial services provision for credit losses
Selling, administrative and engineering expense
Restructuring expense and asset impairment
Total costs and expenses
Operating income
Investment income
Interest expense
Loss on debt extinguishment
Income before provision for income taxes
Provision for income taxes
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income (loss)
Earnings per common share from continuing operations:
Basic
Diluted
Earnings (loss) per common share from discontinued operations:
Basic
Diluted
Earnings (loss) per common share:
Basic
Diluted
Cash dividends per common share
2012
2011
2010
$4,942,582
637,924
5,580,506
$4,662,264
649,449
5,311,713
$4,176,627
682,709
4,859,336
3,222,394
195,990
22,239
1,111,232
28,475
4,580,330
1,000,176
7,369
46,033
3,106,288
229,492
17,031
1,060,943
67,992
4,481,746
829,967
7,963
45,266
961,512
337,587
623,925
$623,925
792,664
244,586
548,078
51,036
$599,114
$2.75
$2.72
$2.35
$2.33
$1.11
$1.11
$0.00
$0.00
$0.22
$0.22
($0.48)
($0.48)
$2.75
$2.72
$0.62
$2.57
$2.55
$0.48
$0.63
$0.62
$0.40
2,749,224
272,484
93,118
1,020,371
163,508
4,298,705
560,631
5,442
90,357
85,247
390,469
130,800
259,669
(113,124)
$146,545
See accompanying notes
Harley-Davidson's 2012 10K, Page 54
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
7
EXERCISE
HARLEY-DAVIDSON, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1012, 2011 and 2010
(In thousands, except per share amounts)
Common Stock
Issued
Shares
Balance December 31, 2009
Net income
Total other comprehensive income, net of tax (Note 11)
Adjustment for consolidation of QSPEs under ASC Topics 810 and 860
Dividends
Repurchase of common stock
Share-based compensation and 401(k) match made with Treasury shares
Issuance of nonvested stock
Exercise of stock options
Tax benefit of stock options and nonvested stock
Balance December 31, 2010
Net income
Total other comprehensive income, net of tax (Note 11)
Dividends
Repurchase of common stock
Share-based compensation and 401(k) match made with Treasury shares
Issuance of nonvested stock
Exercise of stock options
Tax benefit of stock options and nonvested stock
Balance December 31, 2011
Net income
Total other comprehensive income, net of tax (Note 11)
Dividends
Repurchase of common stock
Share-based compensation and 401(k) match made with Treasury shares
Issuance of nonvested stock
Exercise of stock options
Tax benefit of stock options and nonvested stock
Balance December 31, 2011
336,800,970
Additional
Paid-in capital
Balance
$3,368
$871,100
Retained
Earnings
$6,324,268
146,545
(40,591)
(94,145)
Accumulated
Other
comprehensive
income (loss)
($417,898)
Treasury
Balance
($4,672,720)
48,193
3,483
(1,706)
823,594
635,892
8
6
338,260,456
$3,382
26,961
(8)
7,839
2,163
$908,055
$6,336,077
($366,222)
($4,674,426)
599,114
Total
$2,108,118
146,545
(37,108)
(94,145)
(1,706)
26,961
7,845
2,163
$2,206,866
599,114
(110,511)
(111,011)
473,240
373,534
5
4
339,107,230
$3,391
49,993
(5)
7,836
2,513
$968,392
(224,551)
3
$6,824,180
($476,733)
($4,898,974)
623,925
(130,945)
(141,681)
535,807
1,622,801
6
16
341,265,838
$3,413
42,056
(6)
45,957
9,670
$1,066,069
(311,632)
2
$7,306,424
($607,678)
($5,210,604)
(111,011)
(224,551)
49,996
7,840
2,513
$2,420,256
623,925
(130,945)
(141,681)
(311,632)
42,058
0
45,973
9,670
$2,557,624
See accompanying notes
Harley-Davidson's 2012 10K, Page 59
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
8
NAVIGATING ACCOUNTING®
HARLEY-DAVIDSON INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1012, 2011 and 2010
(In thousands)
Net cash provided by operating activities of continuing operations (Note 2)
Cash flows from investing activities of continuing operations:
Capital expenditures
Originations of finance receivables
Collections on finance receivables
Purchases of marketable securities
Sales and redemptions of marketable securities
Net cash (used by) provided by investing activities of continuing operations
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium term notes
Repayment of medium term notes
Repayment of senior unsecured notes
Proceeds from securitization debt
Repayments of securitization debt
Borrowings of asset-backed commercial paper
Net repayments in asset-backed commercial paper
Net (decrease) increase in credit facilities and unsecured commerical paper
Net change in restricted cash
Dividends
Purchase of common stock for treasury
Excess tax benefits from share-based payments
Issuance of common stock under employee stock option plans
Net cash (used by) provided by financing activities of continuing operations
Effect of exchange rate changes on cash and cash equivalents of continuing operations
Net increase (decrease) in cash and cash equivalents of continuing operations
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations
Cash flows from investing activities of discontinued operations
Effect of exchange rate changes on cash and cash equivalents of discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Cash and cash equivalents beginning of period
Cash and cash equivalents of discontinued operations beginning of period
Net increase (decrease) in cash and cash equivalents
Less: Cash and cash equivalents of discontinued operations end of period
Cash and cash equivalents end of period
2012
$801,458
2011
$885,291
2010
$1,163,418
(189,002)
(2,858,701)
2,768,089
(4,993)
23,296
(261,311)
(189,035)
(2,622,024)
2,760,049
(142,653)
130,121
(63,542)
(170,845)
(2,252,532)
2,668,962
(184,365)
84,217
145,437
993,737
(420,870)
447,076
(59,211)
763,895
(1,405,599)
200,417
(24,301)
(744,724)
41,647
(141,681)
(311,632)
13,065
45,973
(990,073)
(8,886)
(458,812)
1,082,599
(1,754,568)
(200,000)
(380,757)
598,187
(1,896,665)
(483)
237,827
59,232
(111,011)
(224,548)
6,303
7,840
(308,944)
(7,788)
505,017
(845)
30,575
77,654
(94,145)
(1,706)
3,767
7,845
(1,856,090)
4,940
(542,295)
(71,073)
(458,812)
1,526,950
(458,812)
$1,068,138
(1,195)
(72,268)
(614,563)
505,017
1,021,933
1,630,433
6,063
(614,563)
505,017
$1,526,950
$1,021,933
See accompanying notes
Harley-Davidson's 2012 10K, Page 58
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
9
EXERCISE
Excerpt from Note 2 of HD’s Fiscal 2012 10K
EXCERPT FROM NOTE 2 (Additional Balance Sheet and Cash Flow Information)
Inventories, net (in thousands)
December 31
2012
Components at the lower of FIFO cost or market
Raw materials and work in process
Motorcycle finished goods
Parts and accessories and general merchandise
Inventory at lower of FIFO cost or market
Excess of FIFO over LIFO cost
$111,335
205,660
122,418
439,413
(45,889)
$393,524
2011
$113,932
226,261
121,340
461,533
(43,527)
$418,006
Harley-Davidson's 2012 10K, Page 64
EXCERPT FROM NOTE 2 (Additional Balance Sheet and Cash Flow Information)
Amounts in thousands
Cash flows from operating activities:
Net income (loss)
Income (loss) from discontinued operations
Income from continuing operations
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Amortization of deferred loan origination costs
Amortization of financing origination fees
Provision for employee long-term benefits
Contributions to pension and postretirement plans
Stock compensation expense
Net change in wholesale finance receivables related to sales
Provision for credit losses
Loss on debt extinguishment
Pension and postretirement healthcare plan curtailment and settlement expense
Goodwill and other impairments
Deferred income taxes
Foreign currency adjustments
Other, net
Changes in current assets and liabilities:
Accounts receivable, net
Finance receivables accrued interest and other
Inventories
Accounts payable and accrued liabilities
Restructuring reserves
Derivative instruments
Other
Total adjustments
Net cash provided by operating activities of continuing operations
2012
2011
2010
$623,925
623,925
$599,114
51,036
548,078
$146,545
(113,124)
259,669
168,978
78,592
9,969
71,347
(244,416)
40,815
2,513
22,239
4,323
6,242
180,408
78,695
10,790
59,441
(219,695)
38,192
(2,335)
17,031
9,608
236
255,171
87,223
19,618
79,630
(39,391)
30,431
81,527
93,118
85,247
31,824
128,452
9,773
(7,216)
87,873
10,678
(15,807)
(17,591)
(21,480)
11,910
(13,690)
(4)
21,459
(10,798)
(16,087)
2,758
(97,716)
177,533
$801,458
43,050
5,027
(94,957)
120,291
8,072
(2,488)
3,103
337,213
$885,291
2,905
10,083
2,516
215,013
(32,477)
5,339
3,133
903,749
$1,163,418
Operating section as presented in note 2.
Harley-Davidson's 2012 10K, Page 66
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson