Reference no: EM13998325

CASE ASSIGNMENT - General Electric Company

Edited Inventory Note-

	Year 3	Year 2
	(millions of dollars)
Raw materials and work in process	$ 4,894	$ 4,708
Finished goods	4,379	3,951
Unbilled shipments	372	312
	9,645	8,972
Less revaluation to LIFO	(606)	(676)
	$ 9,039	$ 8,295

LIFO revaluations decreased $70 million in Year 3, compared with decreases of $169 million in Year 2 and $82 million in Year 1. Included in these changes were decreases of $21 million, $8 million and $6 million in Year 3, Year 2 and Year 1, respectively that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years.

GE's earnings before income taxes were $18.891 billion in Year 3. Assume a 35% marginal tax rate. Requirements:

1. What are the total cumulative tax savings as of December 31, Year 3 that GE has realized as a result of using the LIFO inventory method?

2. What would GE's pre-tax earnings have been in Year 3 if it had been using FIFO?

3. What December 31, Year 3 balance sheet figures would be different-and by how much-if GE had used FIFO to account for its inventories?

4. What were the LIFO liquidation profits reported in Year 3 both pre-tax and after-tax?

5. Explain what factors cause the difference between the LIFO pre-tax income number and the FIFO pre-tax income number you estimated in requirement 2. (Hint:  Reconcile the change in the LIFO reserve for Year 3.)

LIFO Reserve-

Beginning Inventory LIFO	+ Beginning LIFO Reserve	Beginning Inventory FIFO
Plus:		Plus:
Purchases		Purchases
Available for Sale LIFO		Available for Sale FIFO
Less:	Less:	Less:
Ending Inventory LIFO	+ Ending LIFO Reserve	Ending Inventory FIFO
COGS LIFO	+ Decrease in LIFO Reserve	COGS FIFO
	or
	- Increase in LIFO Reserve

Inventory _LIFO + LIFO _Reserve  = Inventory _FIFO

Beginning LIFO _Reserve - Ending LIFO _Reserve = Δ LIFO _Reserve

When the LIFO reserve amount decreases,

COGS _LIFO + Decrease in LIFO _Reserve = COGS _FIFO

When the LIFO reserve amount increases,

COGS _LIFO - Increase in LIFO _Reserve  = COGS _FIFO

Requirement 1: What are the total tax savings as of 12/31/2011 that ABC has realized as a result of using the LIFO inventory method?

Requirement 2: What would ABC's pre-tax earnings have been in 2011 if they had been using FIFO?

Requirement 3: What 12/31/2011 balance sheet figures would be different and by how much if ABC had used FIFO?

Requirement 4: What were the LIFO liquidation profits in 2011 both pretax and after tax.

Requirement 5: Reconcile the change in the LIFO reserve for 2011.