operations mgt

General Electric Company

Edited Inventory Note

(millions of dollars)

                                                            2011      2010

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 2011, compared with decreases

of $169 million in 2010 and $82 million in 2009. Included in these changes

were decreases of $21 million, $8 million and $6 million in 2011, 2010 and

2009, 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 2011. Assume a 35% marginal tax rate.

Requirements:

1. What are the total cumulative tax savings as of December 31, 2011 that

GE has realized as a result of using the LIFO inventory method?

2. What would GE’s pre-tax earnings have been in 2011 if it had been using

FIFO?

3. What December 31, 2011 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 2011 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 2011.)

END OF PAGE ONE: START OF PAGE TWO

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