FINANCIAL MANAGEMENT ASSIGNMENT - LEWIS CORPORATION CASE : 6-2 Question 1 Statement showing calculation of COGS and Closing stock

(2005) Particulars Opening Inventory Add: Purchases Qty 1840 600 800 400 200 3840 2820 1020 Rate 20 20.25 21 21.25 21.5 Actual Amount 36800 0 12150 16800 8500 4300 78550

COGS & closing stock valuation Valua Average cost FIFO L Rate value QTY Value QTY 1020

sub-total (A) Less: consumed/sales/COGS-[A-B] closing inventory(B)

420 8820 400 8500 200 4300 1020 21620 20.46 20.46 57685 20865 56930 21620

1020

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Statement showing calculation of COGS and Closing stock (2006) Opening Balance Particulars Opening inventory Add: Purchases Qty 1020 700 700 700 1000 4120 3080 1040 21.5 21.5 22 22.25 15050 15050 15400 22250 67750 21.51 21.51 66246 22369 Rate Actual Amount Average cost 20865 FIFO 21620

COGS & closing stock valuation Valua Average cost FIFO L LIFO Rate value QTY Value QTY 20400 20.46 1020 20 40 880 1000 22250 1040 23130 66240 23130

sub-total (A) Less: consumed/sales/COGS-[A-B] closing inventory(B)

35.75

Statement showing calculation of COGS and Closing stock (2007) Opening Balance Particulars Opening inventory Add: Purchases Qty 1040 1000 700 700 700 4140 2950 1190 22.5 22.75 23 23.5 22500 15925 16100 16450 70975 22.55 22.55 66513 26831 Rate Actual Amount Average cost 22368.8 FIFO 23130

COGS & closing stock valuation Valua Average cost FIFO L LIFO Rate value QTY Value QTY 20830 21.51 1040 150 490 11270 700 16450 1190 27720 66385 27720

sub-total (A) Less: consumed/sales/COGS-[A-B] closing inventory(B)

35.75

Prepared by : Kartik T Mamlatdarna

LIFO Value 20400

20400 58150 20400

LIFO Value 20400 430

20830 67320 20830

LIFO Value 20830 3375

24205 67600 24205

FINANCIAL MANAGEMENT ASSIGNMENT - LEWIS CORPORATION CASE : 6-2 Question 2 Conversion from FIFO to LIFO and its Tax Implication PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED

2005 Sales COGS Gross Profit Tax @ 40% Net Profit FIFO 95880 56930 38950 15580 23370 LIFO 95880 58150 37730 15092 22638

2006 FIFO 110110 66240 43870 17548 26322

2007 LIFO FIFO LIFO 110110 105462.5 105462.5 67320 66385 67600 42790 39077.5 37862.5 17116 15631 15145 25674 23446.5 22717.5

Less Less

Income Tax payable and Profit Year FIFO LIFO Savings in Tax Profit Tax Profit tax from 2005 15580 23370 15092 22638 488 2006 17548 26322 17116 25674 432 2007 15631 23446.5 15145 22717.5 486

CONCLUSION : The above analysis shows the tax implication and profit under FIFO and LIFO method of inventory valuation.It is observed that changing from FIFO to LIFO does not result in significant benefit in the tax savings by the company.Therefore, it is advisable that the company continues with the existing method of stock valuation over the coming years.

Prepared by : Kartik T Mamlatdarna

FINANCIAL MANAGEMENT ASSIGNMENT - LEWIS CORPORATION CASE : 6-2

QUESTION 3 STATEMENT SHOWING EFFECT ON PROFIT/LOSS DUE TO RECESSION FOR THE YEAR 2008 2005 2006 2007 Particulars FIFO LIFO FIFO LIFO FIFO LIFO Sales 95880 95880 110110 110110 105462.5 105462.5 Less COGS 56930 58150 66240 67320 66385 67600 Gross Profit 38950 37730 43870 42790 39077.5 37862.5 Gross Profit(%) 41 39 40 39 37 36 Less Tax @ 40% 15580 15092 17548 17116 15631 15145 Net Profit 23370 22638 26322 25674 23446.5 22717.5

2008(Forecast) FIFO LIFO 96525 96525 63960 61908.87 32565 34616.13 34 36 13026 13846.45 19539 20769.68

WORKING NOTE : Calculation of COGS and closing stock valuation for 2008 FIFO LIFO Qty Rate Value Qty Rate Value Opening balance 1190 27720 1190 24205 Add : Purchases 1910 24 45840 1910 24 45840 sub total 3100 73560 3100 70045 Less : Cost of sales Closing Inventory 2700 400 63960 9600 2700 400 61908.87 8136.13

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CONCLUSION The above statements highlights the effect of the increased cost of purchases and its effect on the profitability of the company under the FIFO and LIFO method the given case , due to forecasting of inflation in the cost of carton the company is palnning to reeduce the levels of inventory to 400 cartons which will lead to for the year 2008 as compared to previous years.Further, it is observed that under FIFO method the gross profit margin has reduced by 3% where as under LIFO margin has remained constant(i.e 36%).However,the difference in the GPR is due to the following reason : 1) FIFO method records the clsong inventory at the c LIFO method of stock valuation recors the closing inventoris at historical cost .Thus , the closing stock valued under the LIFO method is deflated showing the co earlier periods and not as of the current period.Therefore,following the principle of conservatism it is advisable that Lewis corporation follows the FIFO method valuation.Moreover , if the company decides to follow the LIFO method than it should create LIFO reserve to record the difference in the historical cost and cur

Prepared by : Kartik T Mamlatdarna

FINANCIAL MANAGEMENT ASSIGNMENT - LEWIS CORPORATION CASE : 6-2

QUESTION 4 Computaion of LIFO reserve 2005 2006 2007 FIFO LIFO LIFO Reserve FIFO LIFO LIFO Reserve FIFO LIFO LIFO Reserve 21620 20400 1220 23130 20830 3520 27720 24205 7035 NOTES : 1) LIFO Reserve = FIFO valuation - LIFO Valuation 2) Implication of LIFO Reserve : The LIFO reserve is the difference between the accounting cost of an inventory that is calculated using the FIFO method, and one using the LIFO method. In the typical inflationary environment, the value of a FIFO inventory is higher than the value of a LIFO inventory and vice versa 2) ANALYSIS of LIFO Reserve : In the given case it has been observed that over the years there is a increase in the cost of carton.This indicates that there is a inflation in the market thereby increasing the LIFO reserve over the years as the Inventory valuation as per FIFO method will be more than inventory valuation as per LIFO method.Thus , the increase in the LIFO reserve shows the impact of inflation on the company's recent/latest purchase of inventory.

Prepared by : Kartik T Mamlatdarna

FINANCIAL MANAGEMENT ASSIGNMENT - LEWIS CORPORATION CASE : 6-2 QUESTION 5 The choice of method of valuation by a company depends on various factors.Both FIFO and LIFO method of inventory valuation has its own advantages and disadvantages.For example, a company may choose LIFO method of valuation if it wants to deflate its inventory thereby reducing the profit and savings on tax. Further, in the given case the companies are following the FIFO method of inventory valuation due to the following reason 1) Valuation of inventory at the recent purchase 2) No headache of maintaining LIFO reserve 3) Easy comparison with the similar industry 4) Valuing the stock at NRV/ current replacement cost.

Prepared by : Kartik T Mamlatdarna