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 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.)
Answer

c. BP, p.l.c. (BP) reports its financial information using IFRS. For fiscal year 2014, BP reported 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 fiscal year 2014. (Round your answer to one decimal place.)
Answer

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

Answer 1

Answer

A.

Amount of pretax earnings would have been reported by the company under FIFO(Amount $ (' millions))

                             Pre Tax Earnings Existing                                                         =51,630

Add:                      Aggregate replacement cost of inventories for year 2014               =10,600

Less:                     Aggregate replacement cost of inventories for year 2013               =21,200

                                            Pre Tax Earnings under FIFO                                  =41,030

(The effect of Change in LIFO to FIFO for previous years has to be disclosed separately)

B.

Inventory Turnover = Cost of Goods sold / Average Inventories.

Inventory Turnover = [$ 225,972/ $ 12,250.5] million

= 18.4

Days Inventory Outstanding = 365 days/ 18.4 = 19.83 days

( Average Inventories = (Begining Inventories + Closing Inventories) / 2

= $ [(12,117+12,384) / 2] million

= $ 12,250.5 million )

C.

Inventory Turnover = Cost of Goods sold / Average Inventories.

Average Inventories = (Begining Inventories + Closing Inventories) / 2

= [$ (29,231+18,373) / 2] million

= $ 23,802 million

Inventory Turnover = [$ 281,907/ $ 23,802] million

= 11.8

Days Inventory Outstanding = 365 days/ 11.8

= 30.9 days

D.

Exxon Mobil's Inventory Turnover Ration using FIFO

Particulars	$ Million
a. Cost of Goods sold	2,25,972
b.Opening Inventory (12117+21200)	33,317
c.Closing Inventory (12384+10600)	22,984
d. Average Inventory ((b+c)/2)	28,151
e. Inventory Turnover Ratio (a/d)	8
Inventory Turnover in days (365/e)	45

BP, p.l.c has faster inventory Turnover Ratio