3. How much cash has the LIFO conformity rule saved Ford so far? Assume a tax ra

Question

3. How much cash has the LIFO conformity rule saved Ford so far? Assume a tax rate of 40%.

4. How much cash has the LIFO conformity rule saved Ford during the past year? Assume a tax rate of 40%.

5. Broadly, what economic factors determine the magnitude of the tax savings from using LIFO?

FORD MOTOR COMPANY AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS NOTE 10. INVENTORIES All inventories are stated at the lower of cost or market. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out ("LIFO") basis. LIFO was used for approximately 18% and 17% of total inventories at December 31, 2012 and 2011, respectively. Cost of other inventories is determined by costing methods that approximate a first-in, first-out ("FIFO") basis. Inventories were as follows (in millions: December 31, 2012 December 31 2011 3,697 $ 4,614 8,311 2,847 3,982 6,829 (928) 5,901 Raw materials, work-in-process, and supplies Finished products Total inventories under FIFO (949) 7,362 $ Less: LIFO adjustment Total inventories

Explanation / Answer

Ford has been able to save cost i.e tax by using the LIFO Stock method

Till 2012, the company saved the Tax @ 40% on LIFO stock of 949 = 379.6

For 2012, LIFO adjustment = 949 - 928 = 21

Tax @ 40% =$ 8.4

Factors that determine the magnitude of tax saving is the rate at which inventory was acquired which helps to analyse what is the amount of LIFO adjustment required

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