In its 2008 financial statements, Seneca Foods Corporation reported a change in its inventory method from first-in, first-out (FIFO) to last-in, first-out (LIFO). This change had a profound effect on Senecas earnings for the year ended March 31, 2008, as shown in its income statements:

Note the decrease in net earnings from 2007 to 2008.

Public companies usually publish a press release to announce quarterly and annual net earnings, highlighting and/or explaining the results of operations. Senecas 2008 press release said, in part:

The current year's net earnings were $8,019,000, compared with $32,067,000 last year. These results reflect the Company's decision to implement the LIFO (last-in, first-out) inventory valuation method effective December 30 (beginning of fourth quarter). The effect of this change was to reduce annual pretax earnings by $28,165,000 and net earnings by $18,307,000 below that which would have been reported using the Company's previous inventory method. The Company believes that in this period of significant inflation, the use of the LIFO method better matches current costs with current revenues. This change also results in cash savings of $9,858,000 by reducing the Company's income taxes, based on statutory rates. If the Company had remained on the FIFO (first-in, first-out) inventory valuation method, the pretax results, less non-operating gains, and losses, would have been an all-time record of $42,644,000, up from $40,009,000 in the prior year.

Review what you have learned about the effects of LIFO and FIFO on net income and use the above information to answer the following questions. Please answer in complete sentences and show your calculations for numerical answers.

1. Senecas reasoning for making the change to LIFO is that it matches current costs with current revenues. Explain what is meant by this statement.

2. Seneca states that pretax earnings were reduced by $28,165,000 using LIFO compared to FIFO. Which specific account on the income statement contains the $28,165,000 difference? Which specific account on thebalance sheet was also affected by the same amount? Explain the relationship between these two accounts.

3. Explain why a period of significant inflation results in tax savings upon switching from FIFO to LIFO.

4. Senecas press release claims a cash savings of $9,858,000 on income taxes based on statutory rates. Show how this amount was calculated, assuming the applicable corporate tax rate in 2008 was 35%.

5. If your team members were shareholders of Seneca Foodsin 2008, how would you react to the decrease in net income from the prior year, and to Senecas explanation?

6. We can assume that Senecas top management gave careful thought and consideration to the change from FIFO to LIFO. Do you think their decision was based primarily on matching current costs with current revenues, or on achieving tax savings? Why?

7. Under international accounting standards (IFRS), the LIFO method is not permitted. Why do you think this is true? How would domestic companies react if U.S. accounting standards were changed to conform to IFRS standards regarding inventory cost methods?

Seneca Foods Corporation and Subsidiaries (In thousands of dollars, except per share amounts) Years ended March 31. 2008 2007 2006 $1,080,724 $1,024,853 $ 883,823 Net sales Costs and expenses Cost of product sold Selling, general, and administrative expense Plant restructuring Total costs and expenses Operating income Other (income) expense, net Interest expense, net of interest income of $79, $31, and $286, respectively Earnings before income taxes Income taxes Net earnings 986,458 61,147 497 1.048 102 32,622 (231) 905,207 57,988 713 963.908 60,945 (4,933) 782,351 47,195 1.920 831,466 52,357 1.115 18,143 20,936 15,784 14.710 6,691 8.019 44,942 12.875 $ 32.067 35.458 13.465 $21.993 Basic earnings per common share 0.66 $ 2.65 $ 1.97 Diluted earnings per common share 0.65 $ 2.63 $ 1.96 Seneca Foods Corporation and Subsidiaries (In thousands of dollars, except per share amounts) Years ended March 31. 2008 2007 2006 $1,080,724 $1,024,853 $ 883,823 Net sales Costs and expenses Cost of product sold Selling, general, and administrative expense Plant restructuring Total costs and expenses Operating income Other (income) expense, net Interest expense, net of interest income of $79, $31, and $286, respectively Earnings before income taxes Income taxes Net earnings 986,458 61,147 497 1.048 102 32,622 (231) 905,207 57,988 713 963.908 60,945 (4,933) 782,351 47,195 1.920 831,466 52,357 1.115 18,143 20,936 15,784 14.710 6,691 8.019 44,942 12.875 $ 32.067 35.458 13.465 $21.993 Basic earnings per common share 0.66 $ 2.65 $ 1.97 Diluted earnings per common share 0.65 $ 2.63 $ 1.96