Problem 22-1

The management of Novak Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Novak changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2017. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.

NOVAK INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31
		2013			2014			2015			2016			2017
Salesnet		$13,860			$15,450			$16,640			$18,200			$19,000
Cost of goods sold
Beginning inventory		990			1,100			990			1,110			1,240
Purchases		12,920			13,910			15,000			15,800			16,562
Ending inventory		(1,100)			(990)			(1,110)			(1,240)			(1,350)
Total		12,810			14,020			14,880			15,670			16,452
Gross profit		1,050			1,430			1,760			2,530			2,548
Administrative expenses		700			760			830			910			980
Income before taxes		350			670			930			1,620			1,568
Income taxes (50%)		175			335			465			810			784
Net income		175			335			465			810			784
Retained earningsbeginning		1,200			1,375			1,710			2,175			2,985
Retained earningsending		$1,375			$1,710			$2,175			$2,985			$3,769
Earnings per share		$1.75			$3.35			$4.65			$8.10			$7.84

SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31
2012		2013		2014		2015		2016		2017
$1,000		$1,120		$1,090		$1,270		$1,500		$1,690

Prepare comparative statements for the 5 years, assuming that Novak changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Novak Instruments started business in 2012. (Enter amounts that decrease cost of goods sold using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000). Round all amounts except EPS to the nearest whole dollar, e.g. 5,275. Round Earnings Per Share to 2 decimal places, e.g. 1.62. Round up the tax effects to the next whole dollar.)