Mgmt_200_Spring_2008_solutions_3-3-08(3,3) - financial...

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Management 200 – Introductory Financial Accounting– Spring 2008 Krannert School of Management - Purdue University Solutions to class assignment for March 3, 2008 P7–8. 1 A change that increases beginning inventory will decrease net income while a change that increases ending inventory will increase net income. Impact on GM net income (in millions) Change in ending inventory $2,077.1 Change in beginning inventory (1,784 .5) Increase in pretax income 292.6 Increase in taxes (30%) (87 .8) Increase in net income $ 204 .8 Use of FIFO would result in an increase of $204.8 million in GM reported net income. The change would result in an increase in income taxes because the LIFO conformity rule precludes use of LIFO for tax purposes if a method other than LIFO were used for
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Unformatted text preview: financial reporting. Reported net income $320.5 Increase 204 .8 FIFO net income $525 .3 2. If FIFO had been used, the ending inventory would have been $2,077.1 million higher. Instead LIFO was used and the $2,077.1 million was allocated to cost of goods sold in earlier accounting periods (including the current year). Thus, the cumulative difference between LIFO pretax income and FIFO pretax income was $2,077.1 million, or a difference of $1,454 million after taxes ($2,077.1 x .7). Therefore, retained earnings on a FIFO basis would have been $16,794 million (i.e., $15,340 + $1,454). 3. The reduction in taxes (compared to FIFO) was $87.8 million (calculated in Req. 1)....
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