The following excerpts are from the 2007 10-K of Sturm Ruger & Co., Inc. (NYSE:RGR):
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Reduction in inventory generated positive cash flow for the Company, partially offset by the tax impact of the consequent LIFO liquidation, which generated negative cash flow as it created taxable income, resulting in higher tax payments.”
Year Ended December 31 (In thousands, except per share data)
Less LIFO reserve
Less excess and obsolescence reserve
Total Current Assets
Statements of Income
Year Ended December 31(In thousands, except per share data)
Total net sales
Cost of products sold
Total other income, net
Income before income taxes
Basic and Diluted Earnings Per Share
Cash Dividends Per Share
Notes to Financial Statements
1. Significant Accounting Policies
Inventories are stated at the lower of cost, principally determined by the last-in, first-out (LIFO) method, or market. If inventories had been valued using the first-in, first-out method, inventory values would have been higher by approximately $46.9 million and $57.6 million at December 31, 2007 and 2006, respectively. During 2007 and 2006, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current cost of purchases, the effect of which decreased costs of products sold by approximately $12.1 million and $7.1 million in 2007 and 2006, respectively. There was no LIFO liquidation in 2005.
1. What is the decrease in the LIFO reserve on the balance sheet? How much less was the cost of products sold in 2007, because of LIFO liquidation, according to the note disclosure?
2. How did the decreased cost of products sold compare to operating income in 2007?
3. How did the LIFO liquidation affect cash flows?