Question

Below is information extracted from General Electric’s 10k

current year prior year

Raw materials and work in process 5603 5515

finished goods 2863    2546

Unbilled shipments 246 280

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8712 8341

Less LIFO reserves    (2,226) (2,076)

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LIFO value of inventories 6486 6265   

requirements:

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

	Current Year	Previous Year
Inventory cost under FIFO	8712	8341
Inventory cost under LIFO	6486	6265

	Current Year	Previous Year
Inventory cost under FIFO	8712	8341
Inventory cost under LIFO	6486	6265
Difference in Pretax Income	2226	2076

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

-If FIFO methos would have been used in both the year thenPrevious Year closing stock will be over valued more by 2076 as aresult of which current year open stock will be valued more by 2076.

-Simarly current year Closing inventory will be valued more by 2226.

More Opening stock means the COGS will be more as a reult the profit will be less More Closing stock means the COGS will be less as a result the profit will be more

Impact on current year pretax operating profit-

Decrease in profit due to more Opening inventory value	-2076
Increase in profit due to more closing inventory value	+2226
Net impact	+150 increase in current yaer pretax income due if FIFO would have been applied.

Tax saving = Difference in pretax income * Tax rate

	Current Year	Previous Year
Inventory cost under FIFO	8712	8341
Inventory cost under LIFO	6486	6265
Difference in Pretax Income	2226	2076
Tax rate	35%	35%
Tax savings	779.1	726.6
Total cumulative tax saving = 779.1+726.6	1505.7