Schewer Question ID#: 9078 Balance Sheet (in $ millions) Cash 35 Accounts Payable 60 Accounts Receivable 75 Long Term Debt 120 Inventory 190 Common Stock 360 Equipment 400 Retained Earnings 230 Real Estate 50 Goodwill 20 Inventory is valued under the Last In, First Out (LIFO) cost flow assumption. The LIFO reserve was $50 million on January 1, 2004 and $60 million on December 31, 2004. The firm has operating leases with a present value of $100 million. Rent payments of $20 million equate to $10 million interest expense plus $10 million depreciation expense. A class action lawsuit has been filed against Bingaman for environmental contamination of a wildlife reserve. According to Bingaman’s attorney’s, the likely outcome is a $12,000,000 judgment adverse to Bingaman in early 2006. Because of an increase in market interest rates during the year, the market value of Bingaman’s long-term debt has changed by $15 million. Goodwill is from previous acquisitions. Schindler has determined that Bingaman’s marginal tax rate is 40%, and he assumes that that inflation will average 2.5% per year over the foreseeable future. question: Factoring out the impact of LIFO accounting on Bingaman’s 2004 net income, normal net income for the year ended December 31, 2004, would be: A) $40 million. B) $56 million. C) $44 million. D) $54 million. answer: During 2004, the LIFO reserve increased from $50 to $60 during the year implying that the higher priced new inventory was passed along, understating net income. To calculate the adjustment, we need to multiply the change in the LIFO reserve by (1 − tax rate). Change in LIFO reserve = (50 − 60) = −10. Change in net income = (−)(−10)(1 − 0.4) = +$6. To adjust net income we add the $6 to our original value of $50 for an adjusted value of $56. WTF…why are they adjusting net income when the co. used LIFO? Has to be a mistake right?
question: Factoring out the impact of LIFO accounting on Bingaman’s 2004 net income, normal net income for the year ended December 31, 2004, would be: They asked you to factor out LIFO. I guess this is the answer. Otherwise, I agree that you do not adjustment for that.