Question: The following inventory note appears in General Electric s Year 3

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

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.

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.
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  • CreatedSeptember 10, 2014
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