QUESTION 4 Not complete points out of 10.00 Flag question Analyzing an Inventory
ID: 2570319 • Letter: Q
Question
QUESTION 4 Not complete points out of 10.00 Flag question Analyzing an Inventory Footnote Disclosure The inventory footnote from Deere & Company's 2015 10-K follows. Inventories Most inventories oned by Deere & Company and its U.S. equipment subsidiaries are valued at cost, on the "last-in, first-out" (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the "first-in, first-out (FIFO) basis, or market. The value of gross inventories on the LIFO basis represented 66 percent and 65 percent of worldwide gross inventories at FIFO value at October 31, 2015 and 2014, respectively. If all inventories had been valued on a FIFO basis, estimated inventories by major classification at October 31 in millions of dollars would have been as follows $ millions 2015 2014 Raw materials and supplies $1,559 $1,724 450 654 3,234 3,360 5,243 5,738 Less adjustment to LIFO value 1,426 1,528 $3,817 $4,210 Finished goods and parts 32 Total FIFO value This footnote reveals that not all of Deere's inventories are reported using the same inventory costing method (companies can use different inventory costing methods for different inventory pools) a. What amount does Deere report for inventories on its 2015 balance sheets? s 0 million b. What would Deere have reported as inventories on its 2015 balance sheet had the company used FIFO inventory costing for all of its inventories? s o million C. What cumulative effect has the use of LIFO inventory costing had, as of year-end 2015, on Deere's pretax income compared with the pretax income it would have reported had it used FIFO inventory costing for all of its inwentories? Deere's cumulative pretax income by$ 0 million since it adpoted LIFO inventory costing. d. Assuming a 35% income tax rate, by what cumulative dollars amount has Deere's tax expense been affected by use of LIFO inventory costing as of year-end 2015? Has the use of LIFO inventory costing increased or decreased Deere's cumulative tax expense? (Round answer to one decimal place.) Deere's cumulative income taxes were by $ 0 million as compared to the taxes that would've been paid under the FIFO system. e, what effect has the use of LIFO inventory costing had on Deere's pretax income and tax expense for 2015 only (assume a 35% income tax rate)? (Round answers to one decimal place, if applicable.) 2015 pretax income 2015 tax expense eby$ 0 million. by $ 0 million.Explanation / Answer
Solution:
a. Deere reports $3,817 million for inventories on its 2015 balance sheet. (Its 2014 inventoriesare $4,210 million.)
b. Had Deere used the FIFO method, its 2015 balance sheet would have reported $5,243 million as inventories. (Its 2014 inventories would have been $5,738 million.)
c. Pretax income till the end of fiscal 2015 has been decreased by $1,426 million since Deere adopted LIFO inventory costing ($5,243 million - $3,817 million). It occurs because costs have been increasing and Deere has matched current inventory costs against current selling prices.
d. Cumulative pretax income has been decreased by $1,426 million. Assuming a 35% tax rate, cumulative taxes are lower by $1,426 million x 0.35 = $499.1 million compared to the taxes that Deere would have paid if it used the FIFO system.
e.During 2015, the LIFO reserve decreased by $1,528 million - $1,426 million = $102 million. This increased taxable income by the amount. Assuming a tax rate of 35%,Deere paid $35.7 million ($102 million × 0.35) in 2015 because it used the LIFO costingmethod.The tax savings from part c, above, arise from prior years.