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
?
?
?
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
?
?
?
Total Current Assets
73,512
81,785
?
?
?
Total Assets
$101,882
$117,066
Statements of Income
Year Ended December 31(In thousands, except per share data)
2007
2006
?
?
?
Total net sales
156,485
167,620
Cost of products sold
117,186
139,610
Gross profit
39,299
28,010
Expenses:
?
?
?
Total expenses
30,184
27,088
Operating income
9,115
922
?
?
?
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
?
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?
