# Analyzing an Inventory Footnote Disclosure | General Electric Company

## Analyzing an Inventory Footnote Disclosure

General Electric Company reports the following footnote in its 10-K report.

 December 31 (in millions) 2005 2004 Raw materials and work in process \$ 5,527 \$ 5,042 Finished goods 5,152 4,806 Unbilled shipments 333 402 11,012 10,250 Less revaluation to LIFO (697) (661) \$ 10,315 \$ 9,589

The company reports its inventories using the LIFO inventory costing method.

## (b) What would GE’s 2005 balance sheet have reported for inventories had the company used FIFO inventory costing?

(c) What cumulative effect has GE’s choice of LIFO over FIFO had on its pretax income as of year end 2005?

The cumulative effect is that pretax income has decreased. LIFO matches more “current” inventory costs against current selling prices, thus avoiding the recognition of holding gains.

The cumulative effect is that pretax income has not changed. LIFO and FIFO are simply two different ways to account for inventories. Both methods lead to the same pretax income.

The cumulative effect on pretax income is nonexistent. The LIFO and FIFO methods of inventory accounting cause only cash flow effects, and they do not affect pretax income.

The cumulative effect is that pretax income has increased. FIFO matches more “current” inventory costs against current selling prices, thus avoiding the recognition of holding gains.

The correct answer is: The cumulative effect is that pretax income has decreased. LIFO matches more “current” inventory costs against current selling prices, thus avoiding the recognition of holding gains.

(d) Assume GE has a 35% income tax rate. As of the 2005 year-end, how much has GE saved in taxes by choosing LIFO over FIFO method for costing inventory? (Round your answer to the nearest whole number.)

Has the use of LIFO increased or decreased GE’s cumulative taxes paid?

decreased

increased

The correct answer is: decreased

(e) What effect has the use of LIFO inventory costing had on GE’s pretax income and tax expense for 2005 only (assume a 35% income tax rate)?
2005 pretax income:

increased

decreased

The correct answer is: decreased

by \$Answer 36 million.
2005 tax expense:

increased

decreased

The correct answer is: decreased

by \$Answer -12.6 million.

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