Balance Sheet Information (US$ millions)

John Martinson, CFA, is an equity analyst with a large pension fund. His supervisor, Linda Packard, asks him to write a report on Karp Inc. Karp prepares its financial statements in accordance with U.S. GAAP. Packard is particularly interested in the effects of the company’s use of the LIFO method to account for its inventory. For this purpose, Martinson collects the financial data presented in Exhibits F and G.

Balance Sheet Information (US$ millions)

As of 31 December

2009

2008

Cash and cash equivalents

172

157

Accounts receivable

626

458

Inventories

620

539

Other current assets

125

65

Total current assets

1,543

1,219

Property and equipment, net

3,035

2,972

Total assets

4,578

4,191

Total current liabilities

1,495

1,395

Long-term debt

644

604

Total liabilities

2,139

1,999

Common stock and paid in capital

1,652

1,652

Retained earnings

787

540

Total shareholders equity

2,439

2,192

Total liabilities and shareholders equity

4,578

4,191

Income Statement Information (US$ millions)

For Years Ended 31 December

2009

2008

Sales

4,346

4,161

Cost of goods sold

2,211

2,147

Depreciation and amortization expense

139

119

Selling, general, and administrative expense

1,656

1,637

Interest expense

31

18

Income tax expense

62

48

Net income

247

192

Martinson finds the following information in the notes to the financial statements:

The LIFO reserves as of 31 December 2009 and 2008 are $155 million and $117 million respectively; and
The effective income tax rate applicable to Karp for 2009 and earlier periods is 20%.
If Karp had used FIFO instead of LIFO, the amount of cost of goods sold reported by Karp for the year ended 31 December 2009 would have been closest to:

A. $2,056 million.

B. $2,173 million.

C. $2,249 million.

If Karp had used FIFO instead of LIFO, its reported net income for the year ended 31 December 2009 would have been higher by an amount closest to:

A. $30 million.

B. $38 million.

C. $155 million.

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