ExamII_F2002_Solutions

# ExamII_F2002_Solutions - PART I 8 points The following is...

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1 PART I – 8 points The following is an extract from the 2001 annual report for General Electric: FOOTNOTE - INVENTORIES December 31 (In millions) 2001 2000 ------- ------- GE Raw materials and work in process \$ 4,708 \$ 4,134 Finished goods 4,221 4,280 Unbilled shipments 312 243 ------- ------- 9,241 8,657 Less revaluation to LIFO (676) (845) ------- ------- 8,565 7,812 ------- ------- ================================================================================ LIFO revaluations decreased \$169 million in 2001, compared with decreases of \$82 million in 2000 and \$84 million in 1999. Included in these changes were decreases of \$8 million, \$6 million and \$4 million in 2001, 2000 and 1999, respectively, that resulted from lower LIFO inventory levels (LIFO liquidations). There were net cost decreases in each of the last three years. As of December 31, 2001, GE is obligated to acquire certain raw materials at market prices through the year 2016 under various take-or-pay or similar arrangements. Annual minimum commitments under these arrangements are insignificant. Reported net sales for the fiscal year ended December 31, 2001 are \$52,677 million and reported cost of good sold for the same period totalled \$18,722 million. Earnings before income taxes equalled \$19,701 million and after tax earnings were equal to \$13,684 million. Using the above information answer the following questions: 1. What was the tax rate? (4 points) 19,701*(1-t)=13,684 1-t=0.694584031 t=0.305415968

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2 2. What is the effect on reported income from the LIFO liquidation during the fiscal year ended 2001 (both before AND after tax)? (4 points) \$8 million pre-tax benefit for 2001 \$8*(1-t) = 8*(1-0.3054) = \$5.556672256 million
3 PART II – 12 points Boeing Enterprises enters into a contract to make 10 planes for a client. The contract specifies that the client has to make the following cash payments to Boeing over the next 5 years: Year 1 30% of contract value Year 2 30% of contract value Year 3 20% of contract value Year 4 10% of contract value Year 5 10% of contract value Boeing sells its planes on a “cost plus” basis. That is the terms of the above contract specify that the amount owed by the client is estimated costs (estimated at time contract is signed) plus 25%. At the time the contract is signed the contract value is \$300,000. At the time the contract is signed Boeing expects the total costs of the project to be evenly spread across the five years. Using the above information answer the following questions: 1. At the time the contract is signed what is the expected total cost? (2 points) X*(1.25) = 300,000 X = 240,000 2. If the company used the percentage of completion method and (i) actual costs at the end of the third year have come in as expected and (ii) expected costs for the fourth and fifth year remain unchanged, what is the pre-tax income reported in year 3 for Boeing? (4 points)

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ExamII_F2002_Solutions - PART I 8 points The following is...

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