1. What is the cumulative amount of income tax savings that Manzanita has genera
ID: 2568383 • Letter: 1
Question
1. What is the cumulative amount of income tax savings that Manzanita has generated through 2014 by using the LIFO method instead of the FIFO method?
2. Calculate the inventory turnover ratio under the LIFO.
3. Calculate the inventory turnover ratio under FIFO.
MANZANITA Inc. Balance Sheet information (USS millions) As of December 31 Cash and cash equivalent Accounts receivable Inventories Other current assets 2014 367 1,378 1,260 375 3,380 9,105 12,485 689 2,696 3,385 1,932 5,317 4,956 2,212 7,168 12,485 2013 423 1,364 1,015 195 2,997 8,916 11,913 502 3,073 3,575 1,812 5,387 4,956 1,570 6,526 11,913 Total current assets Property and equipment, net Total assets Account payable Other current liabilities Total current liabilities Long-term debt Total liabilities Common stock and paid in capital Retained earnings Total shareholders' equity otal liabilities and shareholders' equity Income Statement Information (US$ millions) For Years Ended December 31 Sales Cost of goods sold Depreciation expense Selling, general, and administrative expense Interest expense Income tax expense Net income 2014 13,038 6,633 417 4,968 93 185 742 2013 12,483 6,441 357 4,911 54 144 576 Notes The LIFO reserves as of December 31 2014 and 2013 are $465 million and $351 million. The effective tax rate for 2014 and earlier periods is 20%. No items impacted retained earnings other than net income and dividends.Explanation / Answer
Req 1: Tax saving by following LIFO instead of FIFO is as follows: Balance in LIFO reserrves on Dec 31 ,2014: $ 465 million (This represent cumulative impact of LIFO than FIFO) Tax rate 20% Cumulative amount of tax savings till 2014: $ 465 *20% = $ 93 Million Req 2: Inventory turnover ratio: Cost of goods sold / Average Inventory Cost of goods sold under LIFO for 2014: $ 6633 million Average Inventory for 2014 under LIFO: ($ 1260+1015)/2 = $1138 Million Inventory Turnover ratio for 2014: Cost of goods sold/ Average Inventory ($ 6633 /1138) = 5.83 times Note: Invenntory Turnover ratio for 2013 can not be computed as Average Inventory figure is not available. Req 3: 2014 2013 Inventory Under LIFO 1260 1015 Add: LIFO Reserves 465 351 Inventory under FIFO 1725 1366 Average Inventory for 2014 under FIFO ($1725+1366)/2 = $1546 Millions COGS under FIFO in 2014: COGS under LIFO in 2014 6633 Less: Difference in LIFO reserves -114 ($ 465-351 Million) COGS under FIFO in 2014: $6519 Millions Inventory Turnover ratio under FIFO in 2014: COGS under FIFO / Average Inventory ($ 6519 / 1546) Millions = 4.22 times
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