Question

Concept for Analysis 8-10 PLEASE SHOW WORK

Concord 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, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is $406,920.

The company has made the following forecasts for the period 2017-2019.

2017 2018 2019

Unit sales (in millions of units) 1.09 1.02 1.31

Sales price per unit $10 $12 $12

Unit purchases (in millions of units) 1.02 1.09 1.2

Purchase price per unit $8 $9 $10

Annual depreciation $300 $300 $300

(in thousands of dollars)

Cash dividends per share $0.15 $0.15 $0.15

Cash payments for additions $350 $350 $350

to and replacement of

plant and equipment (in thousands of dollars)

Income tax rate 40% 40% 40%

Operating expenses 15% 15% 15%

(exclusive of depreciation) as a

percent of sales

Common shares outstanding 1 1 1

(in millions)

(a) Compute the following data for Concord Company under the FIFO and the LIFO inventory method for 2017-2019. Assume the company would begin LIFO at the beginning of 2017. (Enter amounts in thousands. Round earnings per share values to 2 decimal places, e.g. 52.75. Round other answers to 0 decimal places, e.g. 125.)

(1)

Year-end inventory balances.

(2)

Annual net income after taxes.

(3)

Earnings per share.

(4)

Cash balance.

Answer 1

1	Year end inventory balance
			FIFO method				LIFO method
		2017	2018	2019		2017	2018	2019
	Beginning Inventory	$8,000,000	$7,440,000	$9,000,000		$8,000,000	$7,440,000	$8,070,000
	Purchases	8160000	9810000	12000000		8160000	9810000	12000000
	Cost of good sold	8720000	8250000	12100000		8720000	9180000	12990000
	year end inventory balances	$7,440,000	$9,000,000	$8,900,000		$7,440,000	$8,070,000	$7,080,000
	how to calculate cost of good sold
	In FIFO method (first in first out), we sale firstly opening inventory than purchase
	opening inventory+purchase=1+1.09=2.09 total units we have to sale
	but sale only1.09 million units so first we choose 1 million of opening inventory than from purchase amount
	1000000*8+900000*8
	In LIFO method (Last in first out), we sale firstly from purchase than opening inventory
2	Annual net income after tax
	sales	10900000	12240000	15720000		10900000	12240000	15720000
	cost of good sold	8720000	8250000	12100000		8720000	9180000	12990000
	operating expenses	1635000	1836000	2358000		1635000	1836000	2358000
	annual depreciation	300000	300000	300000		300000	300000	300000
	income before tax	245000	1854000	962000		245000	924000	72000
	income tax	$98,000	$741,600	$384,800		98000	369600	28800
	net income after tax	$147,000	$1,112,400	$577,200		147000	554400	43200
3	Earning per share
	Net income after tax	$147,000	$1,112,400	$577,200		$147,000	$554,400	$43,200
	common share outstanding	1000000	1000000	1000000		1000000	1000000	1000000
	EPS	$0.15	$1.11	$0.58		$0.15	$0.55	$0.04
4	cash balance
	net income after tax	$147,000	$1,112,400	$577,200		$147,000	$554,400	$43,200
	annual depreciation	300000	300000	300000		300000	300000	300000
	cash flow	$447,000	$1,412,400	$877,200		$447,000	$854,400	$343,200
	capital expenditure	$350,000	$350,000	$350,000		$350,000	$350,000	$350,000
	cash balance	$97,000	$1,062,400	$527,200		$97,000	$504,400	($6,800)