Reference no: EM13912425

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?

(b) What would GE's 2012 balance sheet have reported for inventories had the company used FIFO inventory costing?

(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.

or

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.

or

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.

or

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.)

Has the use of LIFO increased or decreased GE's cumulative taxes paid?

decreased

or

increased

(e) What effect has the use of LIFO inventory costing had on GE's pretax income and tax expense for 2012 only (assume a 35% income tax rate)? (Round answers to the nearest whole number.)

2012 pretax income:

increased

or

decreased

by _______ million.

2012 tax expense:

increased

or

decreased

by _______ million.