Whirlpool Corporation reported 2011 pretax operating profit of $792 million. Footnotes to Whirlpool’s financial statements read, “Inventories are stated at first-in, first-out (‘FIFO’) cost, except U.S. production inventories, which are stated at last-in, first-out (‘LIFO’) cost.” The footnote showed that if the FIFO method of inventory accounting had been used for all inventories, they would have been $203 and $149 million higher than reported at December 31, 2011 and 2010, respectively.
1. Calculate the 2011 pretax income that Whirlpool would have reported if the FIFO inventory method had always been used for all inventories.
2. Suppose Whirlpool’s income tax rate is 34%. What were Whirlpool’s 2011 income taxes using LIFO? What would they have been if Whirlpool had used FIFO?
3. Was Whirlpool’s use of LIFO a good choice from a tax perspective? What is the cumulative financial effect of the choice?