Reference no: EM132744085
Problem - McGrath Company has the following inventory note in its 2020 annual report.
|
($ in millions)
|
2020
|
2019
|
|
Raw materials and work in process
|
$3,943
|
$5,870
|
|
Finished goods
|
5,016
|
2,623
|
|
|
8,959
|
8,493
|
|
Less revaluation to LIFO
|
(420)
|
(560)
|
|
|
$8,539
|
$7,933
|
LIFO revaluations decreased $140 million in 2020, compared with decreases of $169 million in 2019 and $82 million in 2018. Included in these changes were decreases of $30 million, $12 million and $3 million in 2020, 2019, and 2018, respectively, that resulted from lower LIFO inventory levels. There were net cost decreases in each of the last three years.
McGrath's earnings before income taxes were $20.0 billion in 2020. Assume a 21% tax rate.
Required -
1. What are the total cumulative tax savings at the end of 2020, that McGrath has realized as a result of using the LIFO inventory method?
2. What would McGrath's pre-tax earnings have been in 2020 if it had been using FIFO?
3. What 2020 balance sheet amounts would be different -- and by how much -- if McGrath had used FIFO to account for its inventories?
4. How much of the difference in pre-tax earnings between FIFO and LIFO were due to LIFO liquidation profits? From what does the remaining difference result? (Hint: reconcile the change in LIFO reserve for 2020.)