Question

In a recent annual report, General Electric reported the following in its inventory note:

December 31 (dollars in millions) Current Year Prior Year

Raw materials and work in progress $5,613 $5,325

Finished goods $2,813 $2,576

Filled shipments $252 $277

$8,678 $8,178

Less revaluation to LIFO (2,286) (2,096)

LIFO value of inventories $ 6,392 $ 6,082

It also reported a $22 million change in the cost of goods sold due to "lower inventory levels".

Required:

Compute the increase or decrease in the pretax operating profit (loss) that would have been reported for the current year had GE employed FIFO accounting for all inventory for both years

Answer 1

Based on the LIFO reserve for both years, the increase in pretax operating profit would have been $190 million.

What is the change in pretax operating profit?

The change in pretax operating profit if GE used FIFO instead of LIFO is:

= Revaluation to LIFO in current year - Revaluation to LIFO in previous year

Solving gives:

= 2,286 - 2,096

= $190 million.

Because this shows a larger value for ending inventory under FIFO, it means that the Cost of Goods sold would be less thereby increasing profits by $190 million.

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