Financial Disclosure

17 Pages 4349 Words

. Most firms including Briggs and Stratton’s competitor, Tecumseh, use a traditional fiscal year running from January to December (Tecumseh, 2002). By using this shifted fiscal year instead of a traditional January through December fiscal year, Briggs and Stratton can show a lower inventory level on its yearly financial reports. Briggs and Stratton states that its business is seasonal with its highest sales levels and lowest inventory levels in the last two quarters of its fiscal year (Briggs and Stratton, 2002). In addition to using a non-traditional fiscal calendar, Briggs and Stratton also utilizes LIFO cash flow model for 68% its inventory (Briggs and Stratton, 2002). By doing so, Briggs and Stratton reduces its inventory accounts and improves its inventory turnover ratios. Briggs and Stratton reported a LIFO reserve of $44.8 mil in 2002 and a reserve of $51.3 mil in 2001 (Briggs and Stratton, 2002). This corresponds to a 23% and 15% difference respectively between LIFO and FIFO cash flow models. This indicates that Briggs and Stratton is most likely holding obsolete inventory that minimizes its inventory levels. In addition to lowering inventory account levels on the balance sheet, LIFO cash flow model also helps to reduce variability in the gross margin by damping changes in prices of raw materials and direct labor.
Besides affecting the balance sheet, inventory accounting policies also affect the income statement. During periods of rising prices, LIFO results in higher costs of goods sold. It results in a lower current ratio and increases record keeping costs. Briggs and Stratton has reduced the amount of inventory that it uses LIFO methods to account for from 77% in 2001 to 68% in 2002 (Briggs and Stratton, 2002). However, this may be due to legitimate reasons such as outsourcing fewer subassemblies. However, at the same time the company may be using this change in cash flow models to hide increasing costs ...