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
Cash and cash equivalents
Other current assets
Total current assets
Property and equipment, net
Total current liabilities
Common stock and paid in capital
Total shareholders equity
Total liabilities and shareholders equity
Income Statement Information (US$ millions)
For Years Ended 31 December
Cost of goods sold
Depreciation and amortization expense
Selling, general, and administrative expense
Income tax expense
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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