Hey Chegg, I know what the answers are, but I have a hard time explaining why. C
ID: 2462220 • Letter: H
Question
Hey Chegg, I know what the answers are, but I have a hard time explaining why. Could you take a look at it and help me out. It would help me a lot. Thank you.
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
In respect of questions that follow (1) give reasons for your choice (2) Give reasons why other choices are not appropriate
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?
I know the answer is $15,295 million. Is the reason for this answer because I add 9,295 + 6,020 + 378 - 398 = 15,295 or is there another reason?
(b) What would GE's 2012 balance sheet have reported for inventories had the company used FIFO inventory costing?
I know the answer is $15,693 million. Is the reason for this answer because I add 9,295 + 6,020 + 378 = 15,693 or is there another reason, when dealing with FIFO inventory costing method, instead of LIFO. Could you please explain.
(c) What cumulative effect has GE's choice of LIFO over FIFO had on its pretax income as of year end 2012?
On mybusinesscourse, the answer is suppose to be the first choice. Could you please explain why choice a is the correct answer?
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.)
I know the answer is $139 million because (pretax saving for LIFO) 398 x 0.35 (tax rate) gets you the answer, but leading to the next question, could you explain why the use of LIFO has decreased GE's cumulative taxes paid?
Has the use of LIFO increased or decreased GE's cumulative taxes paid?
decreased
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 by $450 million -$398 million = $52 million. I know that is the answer, but could you explain to me why there is an increase. I have a hard time explaining it in detail.
increased
decreased
by $Answer million.
2012 tax expense: increased by $52 million x 35% = $18 million. Just like the previous one, could you explain to me, why there is an increase.
increased
decreased
by $Answer million.
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
December 31 (In millions) 2005 2004
GERaw materials and work in process $5,527 $5,042
Finished goods 5,152 4,806
Unbilled shipments 333 402
11,012 10,250
Less revaluation to LIFO (697) (661) 10,315 9,589 GECSFinished goods 159 189
Total $10,474 $9,778 As of December 31, 2005, we were obligated to acquire certain raw materials at market prices through theyear 2027 under various take-or-pay or similar arrangements. Annual minimum commitments under thesearrangements are insignificant.5
b.
Inventory balance would have been $15,693 if FIFO is used.
c.
Cumulative effect: The LIFO effect increases pretax income, since FIFO matches more current inventory compare to LIFO.
Answer: The last option is correc
(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.)
GE saved in taxes by choosing LIFO over FIFO method for costing inventory = 398*35%
GE saved in taxes by choosing LIFO over FIFO method for costing inventory = $ 139 Million
(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 increase by = 450 - 398
2012 pretax income increase by = $ 52 Million
2012 tax expense: increased by = 52*35%
2012 tax expense: increased by == $ 18.20 million