Teaching Note for Merrimack Tractors and Mowers, Inc.: LIFO or FIFO
Chapman, Craig, Sharon M. Bruns, William E. Bruns and Susan Harmeling
In 2008 Merrimack Tractors and Mowers finds itself in a situation where product manufacturing costs are increasing faster than competitors’ costs, and as a result earnings are likely to fall below those reported in 2007. The company president and the company controller have discussed this problem, and the controller has mentioned the idea that if the company changed from LIFO to FIFO it might be possible to maintain earnings growth in 2008. He prepared a memo to the president explaining how inventory flow assumptions work and provides pro-forma income statements that show that for one product (reel mower units) adopting FIFO would allow Merrimack to report higher income in 2008 than it did in 2007, but higher income taxes would have to be paid.
The case is designed to be used in an introductory financial accounting course to explore the differential effects of LIFO and FIFO accounting on inventory valuation. Discussions can also explore the ethical questions which may arise as managers consider changes in accounting policies.
Chapman, Craig, Sharon M. Bruns, William E. Bruns and Susan Harmeling. 2008. Teaching Note for Merrimack Tractors and Mowers, Inc.: LIFO or FIFO. Boston: Harvard Business Publishing, Case 3219.