The following excerpts are from the 2007 10-K of Sturm Ruger & Co., Inc. (NYSE:RGR):

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.”

Balance Sheets

Year Ended December 31 (In thousands, except per share data)

2007

2006

Assets

Current Assets

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?

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Gross inventories:
Less LIFO reserve
Less excess and obsolescence reserve

64,330
(46,890)
(4,143)

87,477
(57,555)
(5,516)

Net inventories

13,297

24,406

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?

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Total Current Assets

73,512

81,785

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?

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Total Assets

$101,882

$117,066

Statements of Income

Year Ended December 31(In thousands, except per share data)

2007

2006

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?

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Total net sales

156,485

167,620

Cost of products sold

117,186

139,610

Gross profit

39,299

28,010

Expenses:

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?

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Total expenses

30,184

27,088

Operating income

9,115

922

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?

?

Total other income, net

7,544

921

Income before income taxes

16,659

1,843

Income taxes

6,330

739

Net income

$10,329

$1,104

Basic and Diluted Earnings Per Share

$0.46

$0.04

Cash Dividends Per Share

$0.00

$0.00

Notes to Financial Statements

1. Significant Accounting Policies

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Inventories

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?

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