1) Hey Chegg, I apologize for asking you the same question, but I need help with
ID: 2462534 • Letter: 1
Question
1) Hey Chegg, I apologize for asking you the same question, but I need help with only part C and the 2nd question of part D, dealing with the choices increase and decrease. For part C, you guys say the last choice is the correct answer, but mybusinesscourse says the first choice is the correct answer. You mind telling me who is right and why and explaining in detail how you arrived with the answer so I can explain it for my hw assignment.
2) Also, for part D, I know the answer is $139 million and the answer for the 2nd question is decreased, but could you explain why the use of LIFO decreased GE's cumulative taxes paid?
I really appreciate if you can help me with these 2 specific questions that I have for my hw assignment.
Analyzing an Inventory Footnote Disclosure
General Electric Company reports the following footnote in its 10-K report.
December 31 (in millions)
2012
2011
Raw materials and work in process
$9,295
$8,735
Finished goods
6,020
4,971
Unbilled shipments
378
485
15,693
14,191
Less revaluation to LIFO
(398)
(450)
$15,295
$13,741
The company reports its inventories using the LIFO inventory costing method.
(a) What is the balance in inventories reported on GE's 2012 balance sheet?
$15,295 million
(b) What would GE's 2012 balance sheet have reported for inventories had the company used FIFO inventory costing?
$15,693 million
(c) What cumulative effect has GE's choice of LIFO over FIFO had on its pretax income as of year end 2012?
The cumulative effect is that pretax income has decreased. LIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.
The cumulative effect is that pretax income has not changed. LIFO and FIFO are simply two different ways to account for inventories. Both methods lead to the same pretax income.
The cumulative effect on pretax income is nonexistent. The LIFO and FIFO methods of inventory accounting cause only cash flow effects, and they do not affect pretax income.
The cumulative effect is that pretax income has increased. FIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.
(d) Assume GE has a 35% income tax rate. As of the 2012 year-end, how much has GE saved in taxes by choosing LIFO over FIFO method for costing inventory? (Round your answer to the nearest whole number.)
$139 million
Has the use of LIFO increased or decreased GE's cumulative taxes paid?
decreased
increased
December 31 (in millions)
2012
2011
Raw materials and work in process
$9,295
$8,735
Finished goods
6,020
4,971
Unbilled shipments
378
485
15,693
14,191
Less revaluation to LIFO
(398)
(450)
$15,295
$13,741
Explanation / Answer
Answer: C)
Cumulative pretax income (untill the end of fiscal 2012) has been reduced by $398 million (15693 - 15295) since GE adopted LIFO inventory costing.This is because LIFO matches more 'current' inventory costs against current selling prices, thus avoiding the recognition of holding gains that would have resulted had FIFO inventory costing been used.
So, choice 1 is the correct choice.
Answer: D)
Pretax income has been reduced by $398 million.Assuming a 35% tax rate, taxes have been reduced by $398*0.35 = $139.3 million. Since adopting LIFO method, GE has saved $139.3 million dollars in total taxes compared to the taxes the company would have paid had it used FIFO method all along.
In 2011,its cumulative taxes were lower by $157.5 million (450*0.35).
For 2012 only, the LIFO reserve decreased by $52 million (450 million - 398 million). Consequently, 2012 pretax income is $52 million higher, relative to what it would have been with the FIFO method, thus increasing taxes by $18.2 million (52*0.35). In fiscal 2012,the use of LIFO inventory costing did not save taxes for GE. The taxes were saved in prior years.
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