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For these calculations, assume that the marginal tax rate for Deere is 35%. Some data are already provided. Complete the table that follows using information from the financial statements and from the table you completed above. Comment on the results comparing CNH global with Deere’s ‘As Reported’ and as if FIFO income statement and balance sheet information. Deere & Company2012 2011 2010 Net Sales 33,500.90 $ 29,466.10 $ 23,573.20 LIFO cost of goods sold 25,007.80 21,919.40 17,398.00 LIFO net income 3,071.60 2,799.90 1,865.00 LIFO inventory from balance sheet 5,170.00 4,370.60 3,063.00 LIFO reserve from financial statement notes 1,421.00 1,486.00 1,398.00 Total assets from the balance sheet 56,265.80 48,207.40 43,266.80 Calculations to convert LIFO to FIFO:2012 2011 2010 FIFO Inventory = LIFO Inventory + LIFO Reserve $ 6,591.00 $ 5,856.60 $ 4,461.00 FIFO Assets =LIFO Assets + LIFO Reserve 57,686.80 49,692.40 44,664.80 Change in LIFO during the year (end - beg) (65.00) 88.00 FIFO COGS = LIFO COGS - Change in LIFO Reserve 25,072.80 21,831.40 After Tax Effect of LIFO Method = (1 - Marginal Tax Rate)* Change in LIFO reserve (42.25) 57.20 FIFO Net Income = LIFO Net Income + After-tax effect of LIFO method 3,029.35 2,857.10 Fiscal 2012Deere & CompanyCNH GlobalAs Reported As if FIFO As Reported Common-size Cost of Goods Sold 74.65% 74.84% 80.13%
Net Income 3,071.60 3,029.35 1,133.00 Growth in Net Income 263.80 172.25 209.00 Common-size Net Income 9.17% 9.04% 5.83% Total Assets 56,265.80 57,686.80 35,426.00 Inventory 5,170.00 6,591.00 3,734.00 Common-size Inventory 9.19% 11.43% 10.54% CNH Global has a higher cost of goods sold ($15,566) which results in a lower net income of $1,133. Deere & Company’s cost of goods sold is $25,072.80 which results in a higher net income of $3,029.35. Increased in net income for CNH Global is $209 which is lower than Deere & Company’s growth in net income of $172.25. Deere & Company has an inventory of $6,591 which is higher compared to CNH Global. G.The average inventory holding period is estimated using the following formula (The denominator is referred to as the inventory turnover ratio): Use data from the financial statements to estimate the average inventory holding for Deere and CNH Global for fiscal 2011 and 2012. Calculate the metric for both companies with their reported (i.e. unadjusted) numbers. Additional information: CNH Global’s inventory balance at the end of the fiscal 2010 was $2936. Evaluate how well Deere manages its inventory relative to its competitor, CNH Global. Now recalculate the average holding period for Deere using their adjusted (i.e. FIFO) numbers. Do you come to a different conclusion about their inventory turnover in management relative a performance? Calculation of Average Inventory Turnover PeriodDeere & CompanyCNH GlobalDeere & Company (FIFO)2012 2011 2012 2011 2012 2011 Cost of Sales 25,007.00 21,919.00 15,566.00 14,626.00 25,072.80 21,831.40
Average Inventory 4,770.30 3,716.80 3,698.00 3,299.50 6,223.80 5,158.80 Inventory Turnover Ratio 524% 590% 421% 443% 403% 423% Ave. Inventory Holding Period 69.627 61.893 86.713 82.341 90.604 86.250 Deere & Company’s average inventory holding period was 69.63 in fiscal 2013 and 61.89 in fiscal 2012, increasing by 7.74 in 3013. CNH Global’s average inventory holding period was 86.71 in fiscal 2013 and 82.341in fiscal 2012, increasing by 0.46 in 2013. This tells us that CNH Global is obtaining cash from its inventories faster than Deere & Company. However, that is not a correct analysis because Deere & Company’s inventory cost method is LIFO and CNH Global uses FIFO cost method. When calculating the average holding period for Deere using the company’s adjusted FIFO numbers, we can see a big difference. Under FIFO, Deere & Company’s average inventory holding period was 90.6 in fiscal 2013 and 86.250 in fiscal 2012, increasing by 4.35 in 3013. This more accurately shows us the correct numbers and allows us to compare the two companies. This tells us that CNH Global is obtaining cash from its inventories slower than Deere & Company. H. In your own words, describe when LIFO inventory valuation is an advantage for tax purposes. One of the primary benefits of using LIFO is the savings in taxes. When a company uses LIFO, it is able to deduct most of the recently purchased inventory costs. LIFO increases cost of goods sold when inflation occurs which results in a lower income tax expense. Additionally, during times of inflation, LIFO matches current purchases at a higher price and matches it against revenues. This lowers profits and, in turn, decreases income tax expenses. Under LIFO, profits are commonly lower which results in a lower taxable income.