Question

Analyzing an Inventory Footnote Disclosure
The inventory footnote from Deere & Company’s 2015 10-K follows.

Inventories Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost, on the “last-in, first-out” (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the “first-in, first-out” (FIFO) basis, or market. The value of gross inventories on the LIFO basis represented 66 percent and 65 percent of worldwide gross inventories at FIFO value at October 31, 2015 and 2014, respectively. If all inventories had been valued on a FIFO basis, estimated inventories by major classification at October 31 in millions of dollars would have been as follows:

$ millions	2015	2014
Raw materials and supplies	$1,559	$1,724
Work-in-process	450	654
Finished goods and parts	3,234	3,360
Total FIFO value	5,243	5,738
Less adjustment to LIFO value	1,426	1,528
Inventories	$3,817	$4,210

This footnote reveals that not all of Deere's inventories are reported using the same inventory costing method (companies can use different inventory costing methods for different inventory pools).

a. What amount does Deere report for inventories on its 2015 balance sheets? $Answer million

b. What would Deere have reported as inventories on its 2015 balance sheet had the company used FIFO inventory costing for all of its inventories? $Answer million

c. What cumulative effect has the use of LIFO inventory costing had, as of year-end 2015, on Deere's pretax income compared with the pretax income it would have reported had it used FIFO inventory costing for all of its inventories?

Deere's cumulative pretax income has Answerdecreasedincreased by $Answer million since it adpoted LIFO inventory costing.

d. Assuming a 35% income tax rate, by what cumulative dollars amount has Deere's tax expense been affected by use of LIFO inventory costing as of year-end 2015? Has the use of LIFO inventory costing increased or decreased Deere's cumulative tax expense?
(Round answer to one decimal place.)
Deere's cumulative income taxes were Answerhigherlower by $Answer million as compared to the taxes that would've been paid under the FIFO system.

e. What effect has the use of LIFO inventory costing had on Deere's pretax income and tax expense for 2015 only (assume a 35% income tax rate)?
(Round answers to one decimal place, if applicable.)
2015 pretax income Answerdecreasedincreased by $Answer million.
2015 tax expense Answerdecreasedincreased by $Answer million.

Answer 1

a. What amount does Deere report for inventories on its 2015 balance sheets?

Answer: $ 3,817 million

Explanation

We can see that from the inventory classification table provided in the question that inventories are $3817 million in its 2015 balance sheet. The inventory for the prior year is $4,210.

b. What would Deere have reported as inventories on its 2015 balance sheet had the company used FIFO inventory costing for all of its inventories?

Answer: $ 5,243 million

Explanation

The inventory for 2015 =  $ 5,243 million

We can see that from the inventory classification table provided in the question that $ 5,243 million would be recorded if FIFO method was used. So if we see the year 2014, recorded inventory will be $ 5,738 million if FIFO method is used.

c. What cumulative effect has the use of LIFO inventory costing had, as of year-end 2015, on Deere's pretax income compared with the pretax income it would have reported had it used FIFO inventory costing for all of its inventories?

Answer: Deere's cumulative pretax income has decreased by $1,426 million since it adopted LIFO inventory costing

Explanation

As per the classification table provided, the pretax income has decreased by $1,426 million. It is from when Deere has adopted LIFO method.

That is Total FIFO value - Inventories ending balance = 5,243 million - 3,817 million = 1,426 million

The reduction is due to the increase in cost and they have increased the prices according to the cost.

d. Assuming a 35% income tax rate, by what cumulative dollars amount has Deere's tax expense been affected by use of LIFO inventory costing as of year-end 2015? Has the use of LIFO inventory costing increased or decreased Deere's cumulative tax expense?

Answer: Deere's cumulative income taxes were lower by $499.1 million as compared to the taxes that would've been paid under the FIFO system

Explanation

Decreae in Cumulative pretax income = $1,426 million

Tax Rate = 35% tax rate

So Cumulative taxes were lower by = Decreae in Cumulative pretax income * Tax Rate

= 1,426 million * 35% = $499.1 million

For 2014:

Decrease in Cumulative pretax income = $1,528 million

Tax Rate = 35% tax rate

cumulative taxes were lower by = 1,528 million * 35% = $534.8 million

e. What effect has the use of LIFO inventory costing had on Deere's pretax income and tax expense for 2015 only (assume a 35% income tax rate)?

Answer:

2015 pretax income increased by $102 million.

2015 tax expense increased by $35.7 million

Explanation

2014 Decrease in Cumulative pretax income = $1,528 million

2015 Decrease in Cumulative pretax income = $1,426 million

LIFO Reserve change = $1,528 million - $1,426 million = $102 million increase

Tax Rate = 35%

So, tax expense increase/decrease = $102 million * 35% = $35.7 million increase