Question

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 2017. 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.

UTRILLO INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31 2013 2014 2015 2016 2017 Sales—net \(13,964 \)15,506 \(16,673 \)18,221 \(18,898 Cost of goods sold Beginning inventory 1,000 1,100 1,000 1,115 1,237 Purchases 13,000 13,900 15,000 15,900 17,100 Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369) Total 12,900 14,000 14,885 15,778 16,968 Gross profi t 1,064 1,506 1,788 2,443 1,930 Administrative expenses 700 763 832 907 989 Income before taxes 364 743 956 1,536 941 Income taxes (50%) 182 372 478 768 471 Net income 182 371 478 768 470 Retained earnings—beginning 1,206 1,388 1,759 2,237 3,005 Retained earnings—ending \) 1,388 \( 1,759 \) 2,237 \( 3,005 \) 3,475 Earnings per share \(1.82 \)3.71 \(4.78 \)7.68 \(4.70 SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31 2012 2013 2014 2015 2016 2017 \)1,010 \(1,124 \)1,101 \(1,270 \)1,500 $1,720

Instructions 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 2012. (All amounts except EPS are rounded up to the nearest dollar.)

Short answer

The income statement shows the business's income and expenses, and the comparative statements are prepared in step 2.

Step-by-step solution

Definition of Income Statement

An income statement is defined as a financial statement that shows revenues generated and expenses incurred during the year.

Comparative Income Statement

Statement of Income And retained Earnings
	2013 ($)	2014 ($)	2015 ($)	2016 ($)	2017 ($)
Sales-Net	13,964	15,506	16,673	18,221	18,898
Cost of goods sold
Beginning Inventory	1,010	1,124	1,101	1,270	1,500
Purchases	13,000	13,900	15,000	15,900	17,100
Ending Inventory	-1,124	-1,101	-1,270	-1,500	-1,720
Total	12,886	13,923	14,831	15,670	16,880
Gross Profit	1,078	1,583	1,842	2,551	2,018
Administrative Expenses	700	743	832	907	989
Income before taxes	378	840	1,010	1,664	1,029
Income Taxes (50%)	189	420	505	822	515
Net Income	189	420	505	822	514
Retained Earnings- Beginning
As originally reported	1,206	1,388	1,759	2,237	3,005
Adjustment	-1000	-1,100	-1,000	-1,115	-1,237
As restated	1,010	1,124	1,101	1,270	1,500
Retained Earnings_ Ending	1,405	1,832	2,365	3,214	3,782
Weighted Average Number of shares	100	100	100	100	100
EPS	1.89	4.20	5.05	8.22	5.14