TPP109 Lecture Notes - Lecture 1: Polskie Radio Program Iii
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CA8-10 WRITING (FIFO and LIFO) HarrisburgCompany is considering changing its inventory valuation method fromFIFO to LIFO because of the potential tax savings. However,management wishes to consider all of the effects on the company,including its reported performance, before making the finaldecision.
The inventory account, currently valued on the FIFO basis,consists of 1,000,000 units at $8 per unit on January 1, 2017.There are 1,000,000 shares of common stock outstanding as ofJanuary 1, 2017, and the cash balance is $400,000.
The company has made the following forecasts for the period2017â2019.
| 2017 | 2018 | 2019 | |
| Unit sales (in millions of units) | 1.1 | 1.0 | 1.3 |
| Sales price per unit | $10 | $12 | $12 |
| Unit purchases (in millions of units) | 1.0 | 1.1 | 1.2 |
| Purchase price per unit | $8 | $9 | $10 |
| Annual depreciation (in thousands of dollars) | $300 | $300 | $300 |
| Cash dividends per share | $0.15 | $0.15 | $0.15 |
| Cash payments for additions to and replacement of plant andequipment (in thousands of dollars) | $350 | $350 | $350 |
| Income tax rate | 40% | 40% | 40% |
| Operating expenses (exclusive of depreciation) as a percent ofsales | 15% | 15% | 15% |
| Common shares outstanding (in millions) | 1 | 1 | 1 |
Instructions
(a) Prepare a schedule that illustrates andcompares the following data for Harrisburg Company under the FIFOand the LIFO inventory method for 2017â2019. Assume the companywould begin LIFO at the beginning of 2017.
(1) Year-end inventory balances.
(2) Annual net income after taxes.
(3) Earnings per share.
(4) Cash balance.
Assume all sales are collected in the year of sale and allpurchases, operating expenses, and taxes are paid during the yearincurred.
(b) Using the data above, your answer to (a),and any additional issues you believe need to be considered,prepare a report that recommends whether or not Harrisburg Companyshould change to the LIFO inventory method. Support yourconclusions with appropriate arguments.
