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MANAGEMENT 120A Winter 2016 INTERMEDIATE FINANCIAL ACCOUNTING DANNY S. LITT

CASE ASSIGNMENT 2

General Electric: Interpreting a LIFO note

The following inventory note appears in General Electric’s Year 3 annual report.

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.)

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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 or

- Increase in LIFO Reserve

= COGS FIFO

Inventory LIFO + LIFO Reserve = Inventory FIFO

Beginning LIFO Reserve - Ending LIFO Reserve =  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