U. S. Steel Corporation derives most revenues from manufacturing a wide variety of steel products. The steel industry in the United States has experienced intense foreign competition in the past decade, which has caused many U.S. manufacturers, including U. S. Steel, to re-evaluate their product mix and cost structures.
U. S. Steel uses a LIFO cost-flow assumption for inventories, straight-line depreciation for financial reporting, and accelerated depreciation for tax reporting. Exhibit 7.13 presents selected data for U. S. Steel for Year 3 and Year 4. Year 3 was a difficult year for the firm, reporting a net loss of $479 million for the year. Sales rebounded dramatically in Year 4 (approximately a 50 percent increase over Year 3) and the firm reported net income for the year of $1.1 billion.
The income tax rate is 35 percent for Year 2 through Year 4.
Required
a. The excess of FIFO over LIFO inventories was $310 million on December 31, Year 2; $270 million on December 31, Year 3; and $770 million on December 31, Year 4. Compute the cost of goods sold for U. S. Steel for Year 3 and Year 4, assuming that it had used a FIFO cost-flow assumption.
b. Compute the inventory turnover ratio for U. S. Steel for Year 3 and Year 4 using (1) a LIFO cost-flow assumption and (2) a FIFO cost-flow assumption.
c. Compute the amount of depreciation expense that U. S. Steel recognized for income tax purposes for Year 3 and Year 4. Note that the amount reported as the deferred tax liability relating to temporary depreciation differences represents the cumulative income taxes delayed as of each balance sheet date because U. S. Steel uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.
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d. Compute the fixed-asset turnover ratio for Year 3 and Year 4 assuming use of (1) straight-line depreciation and (2) accelerated (tax) depreciation.
e. Compute the rate of return on assets for Year 3 and Year 4 based on the reported amounts (that is, LIFO for inventories and straight-line depreciation). Disaggregate ROA into profit margin and assets turnover components.
f. Repeat part e using FIFO for inventories and accelerated (tax) depreciation. Assume U. S. Steel uses FIFO for both financial and tax reporting. Any tax effects reduce or increase cash. Disaggregate ROA into profit margin and assets turnover components.
g. Compute the rate of return on common shareholders' equity for Year 3 and Year 4 based on the reported amounts. Disaggregate ROCE into two components: (1) Net Income (Loss)/Average Total Assets, and (2) Average Total Assets/Average Common Shareholders' Equity.
h. Repeat part g using FIFO for inventories and accelerated (tax) depreciation.
i. Interpret the changes in the profitability and risk of U. S. Steel between Year 3 and Year 4 in light of the preceding analyses.

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EXHIBIT 7.13 U. S. Steel Financial Statement Data (amounts in millions) (Problem 7.14) Year Ended December 31 Year 4 Year 3 Year 2 2,978 7,837 7,977 365 2,027 3,414 Total Assets Deferred Tax Liability Relating to Temporary ....10,956 495 455 865 Year Ended December 31: Year 4 Year 3 Sales Cost of Goods Sold .$13,969 $9,328 8,469 363 130 (479) 11,407 382 119 1,073 Interest Expense Net Income (Loss).