Exhibit 2 Pro-forma Income Statement, 2007 and 2008 for reel mower units if no change in Inventory Accounting Q.1, a) Study the financial information for reel mower units that James Colburn prepared for Rick Martino (Assume that 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 assuming that the company sells 10,000 units each quarter at a price of $2,000 per unit with Sales General and Administration costs the same as for 2007. 2007 (LIFO) Per Unit 2008 (LIFO) Per Unit Units Cost Units Cost Beginning Inventory Purchases, Quarter 1 Purchases, Quarter 2 Purchases, Quarter 3 Purchases, Quarter 4 Available for Sale Less Sales Ending Inventory 15,000 10,000 10,000 10,000 10,000 55,000 40,000 15,000 900 1,000 1,100 1,200 1,300 (S'000) 13,500 10,000 11,000 12,000 13,000 59,500 46,000 13,500 15,000 10,000 10,000 10,000 10.000 55.000 40.000 15,000 900 1,400 1,500 1.600 1,700 ($'000) 13,500 14,000 15.000 16,000 17,000 75,500 Q.1, b) If Merrimack Tractors and Mowers were to adopt FIFO as of January 1, 2008, how would this affect the financial statements (Balance sheets, Income statements, and Cash flow)? You may assume the 10,000 per quarter of unite sales for 2008. You need to consider the fact that if Merrimack elects to change from LIFO to FIFO, the inventory will have to be adjusted to what it would have been using FIFO all along (use Footnote to the Pro-forma Accounts). 2007 19,000 Footnote to the Pro-forma Accounts Total Inventories under the first-in, first-out ("FIFO") method Less: Last-in, first-out method ("LIFO") adjustmenta Total Inventory Q.1, c) In the pro-forma income statements that James Colburn prepared for Rick Martino, the costs of reel mower units and transportation 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? (5,500) 13,500 Income Statement (thousands of dollars) Salesb Cost of goods sold Gross margin Selling and admin. exp. Income before taxes Income taxes (35%) Net income 2007 (LIFO) $67,000 46,000 $21,000 10,000 $11,000 3,850 $7,150 a This amount is commonly referred to as the LIFO Reserve. b Sales of 40,000 units occurred at a rate of 10,000 units in each quarter during 2007. Exhibit 2 Pro-forma Income Statement, 2007 and 2008 for reel mower units if no change in Inventory Accounting Q.1, a) Study the financial information for reel mower units that James Colburn prepared for Rick Martino (Assume that 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 assuming that the company sells 10,000 units each quarter at a price of $2,000 per unit with Sales General and Administration costs the same as for 2007. 2007 (LIFO) Per Unit 2008 (LIFO) Per Unit Units Cost Units Cost Beginning Inventory Purchases, Quarter 1 Purchases, Quarter 2 Purchases, Quarter 3 Purchases, Quarter 4 Available for Sale Less Sales Ending Inventory 15,000 10,000 10,000 10,000 10,000 55,000 40,000 15,000 900 1,000 1,100 1,200 1,300 (S'000) 13,500 10,000 11,000 12,000 13,000 59,500 46,000 13,500 15,000 10,000 10,000 10,000 10.000 55.000 40.000 15,000 900 1,400 1,500 1.600 1,700 ($'000) 13,500 14,000 15.000 16,000 17,000 75,500 Q.1, b) If Merrimack Tractors and Mowers were to adopt FIFO as of January 1, 2008, how would this affect the financial statements (Balance sheets, Income statements, and Cash flow)? You may assume the 10,000 per quarter of unite sales for 2008. You need to consider the fact that if Merrimack elects to change from LIFO to FIFO, the inventory will have to be adjusted to what it would have been using FIFO all along (use Footnote to the Pro-forma Accounts). 2007 19,000 Footnote to the Pro-forma Accounts Total Inventories under the first-in, first-out ("FIFO") method Less: Last-in, first-out method ("LIFO") adjustmenta Total Inventory Q.1, c) In the pro-forma income statements that James Colburn prepared for Rick Martino, the costs of reel mower units and transportation 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? (5,500) 13,500 Income Statement (thousands of dollars) Salesb Cost of goods sold Gross margin Selling and admin. exp. Income before taxes Income taxes (35%) Net income 2007 (LIFO) $67,000 46,000 $21,000 10,000 $11,000 3,850 $7,150 a This amount is commonly referred to as the LIFO Reserve. b Sales of 40,000 units occurred at a rate of 10,000 units in each quarter during 2007
