Question

Below is information extracted from General Electric’s 10k

Raw materials and work in process 5603 5515

finished goods 2863    2546

Unbilled shipments 246 280

----------------------------------

8712 8341

Less LIFO reserves    (2,226) (2,076)

---------------------------------

LIFO value of inventories 6486 6265

Compute the increase or decrease in the pretax operating profit (loss) that would have been reported for the current year had GE employed FIFO accounting for both years. Indicate whether it was an increase or decrease. (Indicate "increase" or "decrease")

Assuming a marginal tax rate of 35%, compute GE's cumulative tax savings since adopting LIFO

Assuming the same marginal tax rate, compute GE's tax savings this period from using LIFO

Answer 1

Here, the present year and previous year are not mentioned.

We are assuming that the data with LIFO Inventory of 6,486 as current year and LIFO inventory of 6,265 as previous year

LIFO Reserve = FIFO Ending inventory - LIFO Ending inventory

a)

In the given question

FIFO Beginning inventory for current year (that is ending for last year) is 8,341

LIFO Beginning inventory for current year (that is ending inventory of last year) is 6,265

So Opening inventory would have been 2,076 higher under FIFO method

FIFO Ending inventory for current year is 8,712

LIFO Ending inventory for current year is 6,486

So the ending inventory would have been 2,226 higher under FIFO method.

If we have followed FIFO, current year pre tax operatiing income would have been higher by 150 (increase)

(b)

We do not have opening balance of inventory of last year, so assuming that the adoption of LIFO method has taken palce last year

Last year decrease in pre tax operating income due to following LIFO is 2076

Current year decrease in pre tax operating income due to LIFO is 150

Cumulative decrease in profit = 2226

Cumulative tax savings = 2226 x 35% = 779.1

(c)

Tax savings in Current year = current year decrease in pre tax profit x marginal tax rate

= 150 x 35%

= 52.5