Question

Analyzing an Inventory Footnote Disclosure
General Electric Company reports the following footnote in its 10-K report.

December 31 (in millions)	2007	2006
Raw materials and work in process	$ 7,893	$ 5,870
Finished goods	5,025	4,263
Unbilled shipments	539	409
	13,457	10,542
Less revaluation to LIFO	(623)	(564)
	$ 12,834	$ 9,978

The company reports its inventories using the LIFO inventory costing method.

(a) What is the balance in inventories reported on GE's 2007 balance sheet?
$Answer(million)

(b) What would GE's 2007 balance sheet have reported for inventories had the company used FIFO inventory costing?
$Answer(million)

(c) What cumulative effect has GE's choice of LIFO over FIFO had on its pretax income as of year end 2007?

The cumulative effect is that pretax income has decreased. LIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.

The cumulative effect is that pretax income has not changed. LIFO and FIFO are simply two different ways to account for inventories. Both methods lead to the same pretax income.

The cumulative effect on pretax income is nonexistent. The LIFO and FIFO methods of inventory accounting cause only cash flow effects, and they do not affect pretax income.

The cumulative effect is that pretax income has increased. FIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.

(d) Assume GE has a 35% income tax rate. As of the 2007 year-end, how much has GE saved in taxes by choosing LIFO over FIFO method for costing inventory? (Round your answer to the nearest whole number.)
$Answer(million)

Has the use of LIFO increased or decreased GE's cumulative taxes paid?

decreased

increased

(e) What effect has the use of LIFO inventory costing had on GE's pretax income and tax expense for 2007 only (assume a 35% income tax rate)? (Round answers to the nearest whole number.)
2007 pretax income:

increased

decreased

by $Answer million.
2007 tax expense:

increased

decreased

by $Answer million.

Answer 1

Solution:

a)

The balance in inventories reported on GE's 2007 balance sheet = $12,834 million

b)

GE's 2007 balance sheet have reported for inventories had the company used FIFO = $13,457 million

c)

Calculate the difference in pretax income as follows:

Different in pretax income = Inventory as per FIFO - Inventory as per LIFO

=$13,457 million - $12,834 million

=$623 million

Hence, the pretax income has reduced b $623.

Therefore the correct option is "The cumulative effect is that pretax income has decreased. LIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains"

d)

Calculate the amount GE saved in taxes by choosing LIFO over FIFO method for costing inventory as follows:

Tax saving = Different in incomr * tax rate

=$623 million *35%

=$218.05 million.

The use of LIFO decrease GE's cumulative taxes paid

e)

Calculate the tax expenses on differnev as follows:

Difference in pre tax income= $564 -$623

=($59 million)

Tax saving = Difference in income * tax rate

=($59 million) *35%

=($20.65) million.

The pretax income has decreased by $59 million and tax expenses has decreased by $20.65 million.

Please give a Thumbs up ?. Thanks!!