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Financial Reporting and Analysis (7th Ed.)
Chapter 9 Solutions
Inventories
Cases
Cases
C9-1. Daimler AG: Identifying differences and similarities between
IFRS and GAAP (LO 11)
Similarities
1. As a manufacturer, Daimler reports separate values for raw
2. Daimler uses a cost flow assumption – average cost
3. Costs include all expenditures related to acquisition and bringing
Differences
1. Daimler defines market as net realizable value, but in 2015, U.S.
GAAP defined market as the middle value of replacement cost,
net realizable value, or net realizable value less normal markup.
C9-2. General Electric: Interpreting a LIFO note (LO 5, 6, 7)
Requirement 1:
What are the total tax savings as of 12/31/Year 3 that GE has
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
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Total tax savings $212.1
Requirement 2:
What would GE’s pre-tax earnings have been in Year 3 if they had
been using FIFO?
Requirement 3:
What 12/31/Year 3 balance sheet figures would be different and by
how much if GE had used FIFO?
Difference
Requirement 4:
LIFO liquidation profits in Year 3.
Requirement 5:
LIFO reserve on 1/1/Year 3 $676
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 9-2
So FIFO pre-tax income would have been $70 million lower
C9-3. ExxonMobil: Interpreting a LIFO footnote (LO 5, 6, 7)
Requirement 1:
Change in LIFO reserve (in billions):
Because the LIFO reserve decreased, FIFO income (after-tax) would
Requirement 2:
LIFO reserve (in billions) as reported at
Requirement 3:
Exxon-Mobil paid more in income tax by being under LIFO because of the
decline in prices and the liquidation. The extra tax is computed as follows:
Requirement 4:
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
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To answer this part, we must determine the change in the LIFO reserve
after adding back the reserve decrease because of the LIFO liquidation:
Therefore, the estimated rate of price change for Exxon-Mobil’s inventory in 2014
was:
C9-4. Baines Corporation: Using absorption vs. variable costing (LO
12)
Requirement 1:
The mood of the management team undoubtedly changed because
of the considerable decline in 2017 pre-tax profit and, thus, in 2017
bonuses. Since sales and costs remained constant at 2016 levels,
937,500)
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 9-4
excellent efforts in controlling inventories. The compensation
committee could have overridden the bonus formula because of the
A suspicious view might suggest that Mr. Eldred, the president,
knew more about absorption costing than did his management
C9-5. Consequence of IFRS adoption (LO 4, 7, 11)
1. Currently, the LIFO Conformity rule does not allow firms to elect LIFO
for tax reporting unless they use LIFO for financial statement
reporting. IFRS disallows LIFO, so Chevron anticipates it will lose its
2. U.S. Congress has the authority to change tax laws. Therefore, it
could remove the LIFO Conformity rule and thereby allow firms to
report other-than-LIFO for financial statements and retain LIFO for tax
purposes. The SEC does not have the authority to alter tax laws, but
does have the authority to alter the enforcement of financial reporting
C9-6. Caterpillar: Interpreting a LIFO footnote (LO 5, 6, 7)
Requirement 1:
Change in LIFO reserve (in millions):
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
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Requirement 2:
Requirement 3:
Requirement 4:
Requirement 5:
Appendix 9B on Dollar-Value LIFO provides more insights on how price
changes and inventory quantity changes affect the LIFO reserve.
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 9-7
