Question

Problem 1 LIFO TO FIFO:

Most inventories owned by Deere & Company and its United States 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 58 percent and 60 percent of worldwide gross inventories at FIFO value on October 31, 2007 and 2006, 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:

2007   2006

Raw materials and supplies ...........................................                $ 882 $ 712

Work-in-process ...........................................................                      425    372

Finished machines and parts .........................................               2,263 2,013

Total FIFO value ........................................................                       3,570 3,097

Less adjustment to LIFO value .......................................               1,233    1,140

Inventories .................................................................                      $2,337 $1,957

Other Key information from Deere & Company

                                                     2007               2006      

Sales                                       $ 21,489.1       $ 19,884.0

COGS                                        16,252.8          15,362.0

Current Assets                          25,503.0          23,387.0

Current Liabilities                     15,738.1          12,787.5      

What adjustments to the financial statements (balance sheet and income statement) are necessary to convert from LIFO to FIFO for 2007: Assume 31% tax rate.

Answer 1

Adjustments for Income statement of 2007:
S.No	Particulars	Amount ( $ in Millions)
A	Opening stock as per FIFO	3097
B	Opening stock as per LIFO	1957
C	Increase in Opening Stock ( A-B )	1140
D	Closing Stock as per FIFO	3570
E	Closing Stock as per LIFO	2337
F	Increase in Closing Stock ( D-E )	1233
G	Increase in Profit ( F-C )	93
H	Tax Expense ( @ 31 % )	28.83
I	Net Increase in Profit	64.17
Therefore profit will increase by $ 64.17 Millions

Adjustment for Balance sheet of 2007
S.No	Particulars	Amount ( $ in Millions)
I	On Assets Side:
	Current Assets
A	Existing Current Assets	25503
B	Increase in Inventory due to FIFO	1233
C	Decrease in Cash due Increased Tax Payment for 2006	(353)
D	Revised Current Assets	26382.6
	Total Increase on Asset side ( D - A )	879.6
II	On Equity and Liability Side:
A	Existing Current Liabilities	15738.1
B	Increase in Tax Payable	28.83
C	Revised Current Liabilities	15766.93
D	Increase in other equity due to increase in profit	64.17
E	Increase in other equity due to increase in profit of 20006	786.6
	Total Increase on Liability side (C-A+D+E)	879.6

Increase in Profit and tax expense for 2006
S.No	Particulars	Amount ( $ in Millions)
A	Increase in Closing Stock for 2006 ( $ 3097 M - $ 1957 M )	1140
B	Increase in Profit for 2006	1140
C	Increase in Tax Expense for 2006 ( @ 31 % ) ( Will be paid in 2007 )	353.4
D	Net Increase in Profit ( To be added to opening balance of reserves and surplus of 2007 ( In other equity Segment )	786.6