Understanding Inventory Valuation for Automakers, a real-world example: Medium
From the courses I have been teaching 📖
The following note was contained in a recent Ford Motor Company annual report:
Inventory Valuation–Automotive.
Inventories are stated at the lower of cost or market. The cost of most US inventories is determined by the last-in, first-out (“LIFO”) method. The cost of the remaining inventories is determined substantially by the first-in, first-out (“FIFO”) method.
If FIFO were the only method of inventory accounting used by the company, inventories would have been $1,235 million higher than reported this year and $1,246 million higher than reported last year.
1. Determine the ending inventory that would have been reported in the current year if Ford had used only FIFO.
2. The cost of goods sold reported by Ford for the current year was $74,315 million. Determine the cost of goods sold that would have been reported if Ford had used only FIFO for both years.
3. If the company had always used FIFO, what would have been the effects on taxes and retained earnings? Assume 30% marginal tax rate.