CASE ASSIGNMENT - General Electric Company
Edited Inventory Note-
|
Year 3 |
Year 2 |
|
(millions of dollars) |
| Raw materials and work in process |
$ 4,894 |
$ 4,708 |
| Finished goods |
4,379 |
3,951 |
| Unbilled shipments |
372 |
312 |
|
9,645 |
8,972 |
| Less revaluation to LIFO |
(606) |
(676) |
|
$ 9,039 |
$ 8,295 |
LIFO revaluations decreased $70 million in Year 3, compared with decreases of $169 million in Year 2 and $82 million in Year 1. Included in these changes were decreases of $21 million, $8 million and $6 million in Year 3, Year 2 and Year 1, respectively that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years.
GE's earnings before income taxes were $18.891 billion in Year 3. Assume a 35% marginal tax rate. Requirements:
1. What are the total cumulative tax savings as of December 31, Year 3 that GE has realized as a result of using the LIFO inventory method?
2. What would GE's pre-tax earnings have been in Year 3 if it had been using FIFO?
3. What December 31, Year 3 balance sheet figures would be different-and by how much-if GE had used FIFO to account for its inventories?
4. What were the LIFO liquidation profits reported in Year 3 both pre-tax and after-tax?
5. Explain what factors cause the difference between the LIFO pre-tax income number and the FIFO pre-tax income number you estimated in requirement 2. (Hint: Reconcile the change in the LIFO reserve for Year 3.)
LIFO Reserve-
| Beginning Inventory LIFO |
+ Beginning LIFO Reserve
|
Beginning Inventory FIFO |
| Plus: |
|
Plus: |
| Purchases |
|
Purchases |
| Available for Sale LIFO |
|
Available for Sale FIFO |
| Less: |
Less: |
Less: |
| Ending Inventory LIFO |
+ Ending LIFO Reserve
|
Ending Inventory FIFO |
| COGS LIFO |
+ Decrease in LIFO Reserve
|
COGS FIFO |
|
or |
|
|
- Increase in LIFO Reserve
|
|
Inventory LIFO + LIFO Reserve = Inventory FIFO
Beginning LIFO Reserve - Ending LIFO Reserve = Δ LIFO Reserve
When the LIFO reserve amount decreases,
COGS LIFO + Decrease in LIFO Reserve = COGS FIFO
When the LIFO reserve amount increases,
COGS LIFO - Increase in LIFO Reserve = COGS FIFO
Requirement 1: What are the total tax savings as of 12/31/2011 that ABC has realized as a result of using the LIFO inventory method?
Requirement 2: What would ABC's pre-tax earnings have been in 2011 if they had been using FIFO?
Requirement 3: What 12/31/2011 balance sheet figures would be different and by how much if ABC had used FIFO?
Requirement 4: What were the LIFO liquidation profits in 2011 both pretax and after tax.
Requirement 5: Reconcile the change in the LIFO reserve for 2011.