Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management
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.
\r\nThe inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on
\r\nJanuary 1, 2014. There are 1,000,000 shares of common stock outstanding as of January 1, 2014, and the cash balance is $400,000.
\r\nThe company has made the following forecasts for the period 2014–2016.
\r\n2014 2015 2016
\r\nUnit sales (in millions of units) 1.1 1.0 1.3
\r\nSales price per unit $10 $12 $12
\r\nUnit purchases (in millions of units) 1.0 1.1 1.2
\r\nPurchase price per unit $8 $9 $10
\r\nAnnual depreciation (in thousands of dollars) $300 $300 $300
\r\nCash dividends per share $0.15 $0.15 $0.15
\r\nCash payments for additions to and replacement of plant and equipment (in thousands of dollars) $350 $350 $350
\r\nIncome tax rate 40% 40% 40%
\r\nOperating expenses (exclusive of depreciation) as a percent of sales 15% 15% 15%
\r\nCommon shares outstanding (in millions) 1 1 1
\r\nInstructions
\r\n(a) Prepare a schedule that illustrates and compares the following data for Harrisburg Company under
\r\nthe FIFO and the LIFO inventory method for 2014–2016. Assume the company would begin LIFO
\r\nat the beginning of 2014.
\r\n(1) Year-end inventory balances. (3) Earnings per share.
\r\n(2) Annual net income after taxes. (4) Cash balance.
\r\nAssume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are
\r\npaid during the year incurred.
\r\n(b) Using the data above, your answer to (a), and any additional issues you believe need to be considered,
\r\nprepare a report that recommends whether or not Harrisburg Company should change to the
\r\nLIFO inventory method. Support your conclusions with appropriate arguments.