Evaluating the Choice between LIFO and FIFO Based on an Inventory NoteAn annual report for...

Evaluating the Choice between LIFO and FIFO Based on an Inventory Note

An annual report for General Motors Corporation included the following note:

Inventories are stated generally at cost, which is not in excess of market. The cost of substantially all method of inventory valuation had been used by the corporation for U.S. inventories, it is estimated that they would be $2,077.1 million higher at the end of this year, compared with $1,784.5 million higher at the end of last year.

For the year, GM reported net income (after taxes) of $320.5 million. At year-end, the balance of the GM retained earnings account was $15,340 million.

Required:

1. Determine the amount of net income that GM would have reported for the year if it had used the FIFO method (assume a 30 percent tax rate).

2. Determine the amount of retained earnings that GM would have reported at year-end if it always had used the FIFO method (assume a 30 percent tax rate).

3. Use of the LIFO method reduced the amount of taxes that GM had to pay for the year compared with the amount that would have been paid if it had used FIFO. Calculate the amount of this re­duction (assume a 30 percent tax rate).