CASE - General Electric: Interpreting a LIFO noteThe following inventory note appears in General Electric's Year 3 annual report.
General Electric Company
Edited Inventory Note
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.)
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