Question

Analyzing Effects of LIFO on Inventory Turnover Ratios

The current assets of Exxon Mobil Corporation follow:

$ millions	2014	2013
Current assets
Cash and cash equivalents	$4,658	$4,913
Notes and accounts receivable, less estimated doubtful amounts	28,009	33,152
Inventories:
Crude oil, products and merchandise	12,384	12,117
Materials and supplies	4,294	4,018
Other current assets	3,565	5,108
Total current assets	$52,910	$59,308

In addition, the following note was provided in its 2014 10-K report:

Inventories. Crude oil, products, and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method—LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less.

In 2014, 2013, and 2012, net income included gains of $187 million, $282 million, and $328 million, respectively, attributable to the combined effects of LIFO inventory accumulations and drawdowns. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $10.6 billion and $21.2 billion at December 31, 2014, and 2013, respectively.

Required:
a. Exxon Mobil reported pretax earnings of $51,630 million in 2014. What amount of pretax earnings would have been reported by the company if inventory had been reported using the FIFO costing method?

b. Exxon Mobil reported the cost of goods sold of $225,972 million in 2014. Compute its inventory turnover ratio for 2014 using total inventories.
(Round your answer to one decimal place.)

c. BP, p.l.c. (BP) reports its financial information using IFRS. For the fiscal year 2014, BP reported the cost of goods sold of $281,907 million, beginning inventory of $29,231 million and ending inventory of $18,373 million. Compute BP’s inventory turnover ratio for the fiscal year 2014. (Round your answer to one decimal place.)

d. Compare your answers in parts b and c. BP can’t use LIFO to report under IFRS, so, revise your calculations in such a way as to find out which company has faster inventory turnover. (Hint: Calculate Exxon Mobil's inventory turnover ratio as if Exxon Mobil used the FIFO costing method.) (Round your answer to one decimal place.)

Answer 1

Part a:
Particulars	2014 ($'Million)
Inventories :
Crude oil, products and merchandise	12384
Pre-tax earnings of 2014	51630
Less: Closing inventory excess	95
Pre-tax profit using FIFO	51535

Workings:

Adjustment of inventory
Inventory of 2013	12117
Less: Drawdowns and accumulations	282
Adjusted inventory of 2013	11835
Inventory of 2013	12384
Less: Drawdowns and accumulations	187
Adjusted inventory of 2013	12197

Difference between closing and opening inventory under LIFO	267
Difference between closing and opening inventory under FIFO	362
Closing inventory excess	95

Part b
Inventory turnover ratio
Particulars	2014 ($'Million)
Cost of goods sold	225972
Average inventory
Opening inventory	12117
Closing inventory	12384
	24501
Average inventory	12250.5
Inventory turnover ratio (Cost of goods sold / Average inventory)	18.4 Times

Part c:
BP PLC
Particulars	2014 ($'Million)
Cost of goods sold	281907
Average inventory
Opening inventory	29231
Closing inventory	18373
	47604
Average inventory	23802
Inventory turnover ratio (Cost of goods sold / Average inventory)	11.8438367

Part d:
Inventory turnover ratio using FIFO of Exxon Mobil
Particulars	2014 ($'Million)
Cost of goods sold	225972
Average inventory
Opening inventory	11835
Closing inventory	12197
	24032
Average inventory	12016
Inventory turnover ratio	18.8
Inventory turnover ratio of BP PLC
Particulars	2014 ($'Million)
Cost of goods sold	281907
Average inventory
Opening inventory	29231
Closing inventory	18373
	47604
Average inventory	23802
Inventory turnover ratio	11.8

Thus, the inventory turnover ratio of Exxon Mobile would not be change drastically even if FIFO method is used instead of LIFO. As can be seen from the table above the inventory turnover ratio of Exxon Mobile at 18.8 times is certainly far better than the inventory turnover ratio of BP PLC 11.8 times.