E7-29. Analyzing Inventory Footnote Disclosure General Motors Corporation report
ID: 2556482 • Letter: E
Question
E7-29. Analyzing Inventory Footnote Disclosure General Motors Corporation reported the following information in its 10-K report: 2008 Inventories at December 31 (S millions) Productive material, work in process, and supplies..... Finished product, service parts, etc. .. Total inventories at FIFO... Less LIFO allowance ....... Total automotive and other inventories, less allowances. $ 4,849 9,426 14,275 (1,233) $13,042 2007 $ 6,267 10,095 16,362 (1,423) $14,939 The company reports its inventory using the LIFO costing method during 2007 and 2008. a. At what dollar amount are inventories reported on its 2008 balance sheet? b. At what dollar amount would inventories have been reported in 2008 if FIFO inventory cost- ing had been used? c. What cumulative effect has the use of LIFO had, as of year-end 2008, on GM's pretax income, compared to the pretax income that would have been reported using the FIFO costing method? d. Assuming a 35% income tax rate, what is the cumulative effect on GM's tax liability as of year-end 2008? e. In July 2009, GM changed its inventory accounting to FIFO costs. Why do you suppose GM made that choice?Explanation / Answer
1. 2008 Balance sheet reported at LIFO $ 13042. 2. 2008 Balance sheet wuld have reported at FIFO $ 14275. 3. Cumulative pre-tax income has been reduced by 14275-13042= $ 1233 after adoption of LIFO. 4. Tax Liabilities reduced by $1233*35%=$431.55 5. For 2008, LIFO Allowance reduced to 1233 from 1423 i.e. by $190. and hence pretax income is higher by 190 compared to what it would have been if FIFO used and hence increasing tax laibility by 190*35%=$66.5 and hence change of costing inventory.
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