Question

Under indirect inventory accounting the following records provided in Table 4 and the Inventory Footnote is taken from Satin financial statements (amounts in thousands):

                  

       Table 4

Inventory Valuation Numbers for Satin Co. in USD

#	Text	12/31/2010	12/31/2009
1	Inventory at LIFO	219,686	241,154
2	Cost of goods sold	754,661	675,138
3	Stockholders’ Equity	242,503	242,712
4	Net Income	31,185	64,150
5	Tax rate	37%	37%

Inventory Footnote: If the first-in, first-out method of accounting for inventory had been used, inventory would have been approximately $26.9 million and $25.1 million higher than reported at 12/31/2010 and 12/31/2009, respectively. Please

1. Calculate what inventory would have been at 12/31/2010 and 12/31/2009 had the FIFO inventory method been used.

2. What would net income for the year ended 12/31/2010, have been if the FIFO inventory method had been used?

3. Calculate what stockholders' equity would have been at 12/31/2010 and 12/31/2009 had the FIFO inventory method been used.

Answer 1

Value of Opening and Closing Inventory under FIFO

Income of Year 2010 under FIFO:

Net Increase in Inventory under FIFO (reduction in COGS) = 26900000 - 25100000 = 1800000

Tax = 1800000 * 37% = 666000

Net Increase in Net Income for 2010 would have been :

1800000 - 666000 = 1134000

Net Income for 2010 undr FIFO would have been :

31185 + 1134000 = 1165185

Shareholders Equity:

Assumptions:

• 2009 and 2010 Net Incomes are already included in Shareholders Equity figures.
• Effect of 2009 opening inventory ignored as amount not available.