Harrisburg Company is considering changing its inventory valuation method from FIFO
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
final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at
$8 per unit on January 1, 2014. There are 1,000,000 shares of common stock
outstanding as of January 1, 2014, and the cash balance is $400,000.
The company has made the following forecasts for the period 2014–2016.
Instructions
(a) Prepare a schedule that illustrates and compares the following data for Harrisburg
Company under the FIFO and the LIFO inventory method for 2014–2016. Assume the
company would begin LIFO at the beginning of 2014.
(1) Year-end inventory balances. (3) Earnings per share.
(2) Annual net income after taxes. (4) Cash balance.
Assume all sales are collected in the year of sale and all purchases, operating expenses,
and taxes are paid during the year incurred.
(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
Company should change to the LIFO inventory method. Support your conclusions with
appropriate arguments.
Your Answer
The company has made the following forecasts for the period 2014–2016.
2014 2015 2016
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 $0.1 $0.1 $0.15
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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
final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at
$8 per unit on January 1, 2014. There are 1,000,000 shares of common stock
outstanding as of January 1, 2014, and the cash balance is $400,000.
The company has made the following forecasts for the period 2014–2016.
Instructions
(a) Prepare a schedule that illustrates and compares the following data for Harrisburg
Company under the FIFO and the LIFO inventory method for 2014–2016. Assume the
company would begin LIFO at the beginning of 2014.
(1) Year-end inventory balances. (3) Earnings per share.
(2) Annual net income after taxes. (4) Cash balance.
Assume all sales are collected in the year of sale and all purchases, operating expenses,
and taxes are paid during the year incurred.
(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
Company should change to the LIFO inventory method. Support your conclusions with
appropriate arguments.
Your Answer
The company has made the following forecasts for the period 2014–2016.
2014 2015 2016
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 $0.1 $0.1 $0.15
5 5
