Problem
The management of Utrillo Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Utrillo changed its method of pricing inventory from last-in, first-out (LIFO) to average-cost in 2014. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method.
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UTRILLO INSTRUMENT COMPANY
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED MAY 31
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2010
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2011
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2012
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2013
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2014
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Sales-net
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$13,964
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$15,506
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$16,673
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$18,221
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$18,898
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Cost of goods sold
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|
|
|
|
|
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Beginning inventory
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1,000
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1,100
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1,000
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1,115
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1,237
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Purchases
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13,000
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13,900
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15,000
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15,900
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17,100
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Ending inventory
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(1,100)
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(1,000)
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(1,115)
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(1,237)
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(1,369)
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Total
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12,900
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14,000
|
14,885
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15,778
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16,968
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|
Gross profit
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1,064
|
1,506
|
1,788
|
2,443
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1,930
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Administrative expenses
|
700
|
763
|
832
|
907
|
989
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Income before taxes
|
364
|
743
|
956
|
1,536
|
941
|
|
Income taxes (50%)
|
182
|
372
|
478
|
768
|
471
|
|
Net income
|
182
|
371
|
478
|
768
|
470
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Retained earnings-beginning
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1,206
|
1,388
|
1,759
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2,237
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3,005
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Retained earnings-ending
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$1,388
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$1,759
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$2,237
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$3,005
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$3,475
|
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Earnings per share
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$1.82
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$3.71
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$4.78
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$7.68
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$4.70
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SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD
FOR THE YEARS ENDED MAY 31
|
|
2009
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2010
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2011
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2012
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2013
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2014
|
|
$1,010
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$1,124
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$1,101
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$1,270
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$1,500
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$1,720
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Prepare comparative statements for the 5 years, assuming that Utrillo changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Utrillo Instruments started business in 2009.