Chapter 6-2 Group Report

FINANCIAL ACCOUNTING CASE 6-2 Lewis Corporation Case Analysis

Group

:

Members :

2 Carbonell, Rosario Carpio, Nathaniel Zarate, Vic Paulo

Date

:

September 30, 2013

I.

TITLE OF THE CASE: Lewis Corporation

II.

BACKGROUND OF THE CASE Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are given the information shown in Exhibit 1 on transactions during the year affecting Lewis’s inventory account. (The purchases are in sequence during the year. The company uses a periodic inventory method). Exhibit 1

2009 Beginning balance purchases

Sales 2010 Beginning balance purchases

Sales 2011 Beginning balance purchases

Sales III.

1840 600 800 400 200 2820

cartons cartons cartons cartons cartons cartons

$20.00 $20.25 $21.00 $21.25 $21.50 $34.00

1020 700 700 700 1000 3080

cartons cartons cartons cartons cartons cartons

$21.50 $21.50 $22.00 $22.25 $35.75

1040 1000 700 700 700 2950

cartons cartons cartons cartons cartons cartons

$22.50 $22.75 $23.00 $23.50 $35.75

STATEMENT OF THE PROBLEM 1). Calculate the cost of goods sold and year-end inventory amounts for 2009, 2010, and 2011 using the (a) FIFO, (b) LIFO, and (c) average cost methods. 2). Lewis Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40 percent, calculate the tax savings this would have made for 2009 to 2011. Would you recommend that Lewis make the change?

3). Dollar sales for 2012 are expected to drop by approximately 8 percent, as a recession in Lewis’s market is forecasted to continue at least through the first three quarters of the year. Total sales are forecasted to be 2,700 cartons. Lewis will be unable to raise its selling price from the 2011 level of $35.75. However, costs are expected to increase to $24.00 per carton for the whole year. Due to these cost/price pressures, the corporation wishes to lower its investment in inventory by holding only the essential inventory of 400 cartons at any time during the year. What is the effect of remaining on FIFO, assuming Lewis had adopted FIFO in 2009? What is the effect of remaining on LIFO, assuming Lewis had adopted LIFO in 2009? What method would you recommend now? 4).What is the LIFO reserve in 2009? What is the LIFO reserve in 2010? What is the significance of the LIFO reserve number? How much did the LIFO reserve increase in 2010? What is the significance of this increase? 5). Despite continuing inflation in the United States in the 1980s and the early 1990s many companies continued to use FIFO for all or part of their domestic inventories. Why do you believe this was the case?

IV. 1.

ANALYSIS A.) FIFO METHOD

Cost of Goods Sold

Beginning balance purchases

Total Sales

Beginning balance purchases

Total Sales

Beginning balance purchases

Total Sales

2009 Unit 1840 600 800 400 200 3840 2820 2010 Unit 1020 700 700 700 1000 4120 3080 2011 Unit 1040 1000 700 700 700 4140 2950

cartons cartons cartons cartons cartons cartons cartons

Unit Cost $20.00 $20.25 $21.00 $21.25 $21.50

1840 600 380

Total Cost $36,800.00 $12,150.00 $7,980.00

2820

$56,930.00

Cost of Goods Sold Unit 1020 700 700 660

Total Cost $21,620.00 $15,050.00 $15,050.00 $14,520.00

3080

$66,240.00

Cost of Goods Sold Unit 1040 1000 700 210

Total Cost $23,130.00 $22,500.00 $15,925.00 $4,830.00

2950

$66,385.00

Unit 0 0 420 400 200 1020

Total Cost $0.00 $0.00 $8,820.00 $8,500.00 $4,300.00 $21,620.00

$34.00 Unit Cost

cartons cartons cartons cartons cartons

Unit

Ending Inventory

$21.50 $21.50 $22.00 $22.25

cartons

$35.75

cartons cartons cartons cartons cartons

Unit Cost $22.24 $22.50 $22.75 $23.00 $23.50

cartons

$35.75

Ending Inventory Unit 0 0 0 40 1000 1040 Ending Inventory Unit 0 0 0 490 700 1190

Total Cost $0.00 $0.00 $0.00 $880.00 $22,250.00 $23,130.00

Total Cost $0.00 $0.00 $0.00 $11,270.00 $16,450.00 $27,720.00

B.) LIFO METHOD Cost of Goods Sold

Ending Inventory

2009

Total

Unit 1840 600 800 400 200 3840

cartons cartons cartons cartons cartons cartons

Sales

2820

cartons

Beginning balance purchases

Unit Cost $20.00 $20.25 $21.00 $21.25 $21.50

Cost of Goods Sold cartons cartons cartons cartons cartons

Unit Cost $20.00 $21.50 $21.50 $22.00 $22.25

Total

Unit 1020 700 700 700 1000 4120

Sales

3080

cartons

$35.75

2011 Beginning balance purchases

Total Sales

820 600 800 400 200 2820

Total Cost $16,400.00 $12,150.00 $16,800.00 $8,500.00 $4,300.00 $58,150.00

1020 0 0 0 0 1020

Total Cost $20,400.00 $0.00 $0.00 $0.00 $0.00 $20,400.00

Unit 0 680 700 700 1000 3080

Ending Inventory Total Cost $0.00 $14,620.00 $15,050.00 $15,400.00 $22,250.00 $67,320.00

Cost of Goods Sold Unit 1040 1000 700 700 700 4140 2950

Unit

$34.00

2010 Beginning balance purchases

Unit

cartons cartons cartons cartons cartons

Unit Cost $20.03 $22.50 $22.75 $23.00 $23.50

cartons

$35.75

Unit 0 850 700 700 700 2950

Unit 1020 20 0 0 0 1040

Total Cost $20,400.00 $430.00 $0.00 $0.00 $0.00 $20,830.00

Ending Inventory Total Cost $0.00 $19,125.00 $15,925.00 $16,100.00 $16,450.00 $67,600.00

Unit 1040 150 0 0 0 1190

Total Cost $20,830.00 $3,375.00 $0.00 $0.00 $0.00 $24,205.00

C.) AVERAGE COST METHOD

Unit cost

Units Beginning balance purchases

Goods Available for sale Sales Ending Inventory Cost of goods sold Beginning balance purchases

Goods Available for sale Sales Ending Inventory Cost of goods sold Beginning balance purchases

Goods Available for sale Sales Ending Inventory Cost of goods sold

Cost Total

2009 1840 600 800 400 200 3840 2820 1020 2820

cartons cartons cartons cartons cartons cartons cartons cartons cartons

$20.00 $20.25 $21.00 $21.25 $21.50 $20.46 $34.00 $20.46 $20.46

2010 1020 700 700 700 1000 4120 3080 1040 3080

cartons cartons cartons cartons cartons cartons cartons cartons cartons

$20.46 $20,864.84 $21.50 $15,050.00 $21.50 $15,050.00 $22.00 $15,400.00 $22.25 $22,250.00 $21.51 $88,614.84 $35.75 $110,110.00 $21.51 $22,368.80 $21.51 $66,246.05

2011 1040 1000 700 700 700 4140 2950 1190 2950

cartons cartons cartons cartons cartons cartons cartons cartons cartons

$21.51 $22,368.80 $22.50 $22,500.00 $22.75 $15,925.00 $23.00 $16,100.00 $23.50 $16,450.00 $22.55 $93,343.80 $35.75 $105,462.50 $22.55 $26,830.70 $22.55 $66,513.09

$36,800.00 $12,150.00 $16,800.00 $8,500.00 $4,300.00 $78,550.00 $95,880.00 $20,864.84 $57,685.16

2.

Sales Cost of goods sales Gross Margin Tax (40%) Net Income Savings in TAX Net Income difference

2009 2010 2011 FIFO LIFO FIFO LIFO FIFO LIFO 95880 95880 110110 110110 105462.5 105462.5 56930 58150 66240 67320 66385 67600 38950 37730 43870 42790 39077.5 37862.5 15580 15092 17548 17116 15631 15145 23370 22638 26322 25674 23446.5 22717.5 488 432 486 732 648 729

We would not recommend Lewis Corporation to switch from FIFO to LIFO even if it has a TAX savings. Only because, the TAX savings we got from changing from FIFO to LIFO would not compensate the Net income difference from the two methods. FIFO has more income than LIFO.

3.

FIFO Forecast

Cost of Goods Sold

2012

Beginning balance Purchases Total Sales

Unit 1190

Unit Cost $23.29

1910 3100 2700

$24.00

Unit

Ending Inventory

Total Cost 1190 $27,720.00 1510 $36,240.00

Unit 0

Total Cost $0.00

400 $9,600.00

2700 $63,960.00

LIFO Forecast

Cost of Goods Sold

2012

Beginning balance Purchases Total Sales

Unit 1190 1910 3100 2700

Sales Cost of goods sales Gross Margin Tax (40%) Net Income

Unit Cost $20.34 $24.00

Unit

Ending Inventory

Total Cost 790 $16,068.87 1910 $45,840.00 2700 $61,908.87

2009 2010 2011 FIFO LIFO FIFO LIFO FIFO LIFO 95880 95880 110110 110110 105462.5 105462.5 56930 58150 66240 67320 66385 67600 38950 37730 43870 42790 39077.5 37862.5 15580 15092 17548 17116 15631 15145 23370 22638 26322 25674 23446.5 22717.5

Unit 400 0

Total Cost $8,136.13 $0.00

400 $8,136.13

2012 - Forecast FIFO LIFO 96525 96525 63960 61908.87 32565 34616.13 13026 13846.45 19539 20769.68

Since the total sales forecasted for year 2012 is a period of deflation, with FIFO it has lower taxable income and will pay lower taxes than LIFO. For LIFO has higher taxable income and will pay more taxes than FIFO. Therefore, we’ll still recommend FIFO method.

4.

LIFO Rsrv FIFO LIFO LIFO Rsrv FIFO LIFO LIFO Rsrv Increase 21620 20400 1220 23130 20830 2300 1080 2009

2010

The significance of the LIFO reserve number was the amount inventory difference as the period goes on. This value must be in the notes to the financial statement to permit the reader to convert the inventory to a FIFO basis. The 1080 increase on 2010 is the amount needed to add to the LIFO inventory amount to convert it to FIFO.

5.

V.

ALTERNATIVE COURSES OF ACTION

VI.

RECOMMENDATION

VII.

CONCLUSION