Analyzing Effects of LIFO on Inventory Turnover Ratios The current assets of Exx
ID: 2541550 • Letter: A
Question
Analyzing Effects of LIFO on Inventory Turnover Ratios
The current assets of Exxon Mobil Corporation follow:
$ millions
2014
2013
Current assets
Cash and cash equivalents
$13,068
$8,453
Notes and accounts receivable, less estimated doubtful amounts
38,642
32,284
Inventories:
Crude oil, products and merchandise
13,665
11,852
Materials and supplies
3,359
3,124
Other current assets
6,229
5,271
Total current assets
$74,963
$60,984
Inventories. Crude oil, products and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method—LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. In addition, the following note was provided in its 2014 10-K report:
In 2014, 2013, and 2012, net income included gains of $292 million, $317 million, and $207 million, respectively, attributable to the combined effects of LIFO inventory accumulations and drawdowns. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $27.6 billion and $21.3 billion at December 31, 2014, and 2013, respectively.
Required:
a) Exxon Mobil reported pretax earnings of $73,257 million in 2014. What amount of pretax earnings would have been reported by the company if inventory had been reported using the FIFO costing method?
b) Exxon Mobil reported cost of goods sold of $266,534 million in 2014. Compute its inventory turnover ratio for 2014 using total inventories. (Round your answer to one decimal place.)
c) BP, p.l.c. (BP) reports its financial information using IFRS. For fiscal year 2014, BP reported cost of goods sold of $289,618 million, beginning inventory of $26,218 million and ending inventory of $25,661 million. Compute BP's inventory turnover ratio for fiscal year 2014. (Round your answer to one decimal place.)
d) Compare your answers in parts b and c. BP can’t use LIFO to report under IFRS, so, revise your calculations in such a way as to find out which company has faster inventory turnover. (Hint: Calculate Exxon Mobil's inventory turnover ratio as if Exxon Mobil used the FIFO costing method.) (Round your answer to one decimal place.)
$ millions
2014
2013
Current assets
Cash and cash equivalents
$13,068
$8,453
Notes and accounts receivable, less estimated doubtful amounts
38,642
32,284
Inventories:
Crude oil, products and merchandise
13,665
11,852
Materials and supplies
3,359
3,124
Other current assets
6,229
5,271
Total current assets
$74,963
$60,984
Explanation / Answer
b) Inventory Turnover Ratio=Cost of Goods Sold/ Average Inventory
Given, Cost of Goods sold=2,66,534
Opening inventory=11,852+3,124+5,271 =20,247
Closing inventory=13,665+3,359+6,229=23,253
Average Inventory=(Opening+closing)/2
=(20247+23253)/2
=21,750
Inventory Turnover ratio=2,66,534/21,750=12.3 times
c)Inventory Turnover Ratio=Cost of Goods Sold/ Average Inventory
Given,Cost of goods sold= 2,89,618
Opening inventory=26,218, Closing inventory=25,661
Average Inventory=(26218+25661)/2
=25,940
Inventory Turnover ratio=2,89,618/25,940
=11.2 times