Dow Chemical Company HW

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Dow Chemical Accounting Homework

Dow Chemical Company is a manufacturer and supplier of products used primarily as raw materials in the manufacture of customer products and services. Its product lines include chemicals, advanced materials, agro-sciences and plastics businesses. Attached are the excerpts from Dow Chemical’s Annual report for 2012. Based on the information in the financial statements and footnotes, please, answer the questions below. Assume a tax rate of 35%.

1. Which cost flow assumptions does Dow Chemical use to value its inventories?

Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among LIFO, FIFO, and average cost.

What is the value of inventories that
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LIFO liquidation may be due to company not purchasing any more inventory (the prices are too high), and depleting its cheap inventory. When inventory costs are increasing, this results in higher net income. Either involuntary (disruptions in supply) or voluntary (earnings management).

5. Suppose that Dow Chemical has no inventory left at the end of NEXT year (i.e., fiscal year 2013). Would Retained earnings at the end of fiscal year 2013 under their existing accounting policy for inventories be higher than, lower than, or the same as what it would have been had they used FIFO as a cost flow assumption for all of their inventories? If different, by how much? Explain.

Same as RE if they used FIFO. Since there will be nothing left in inventory after the year, Dow Chemical would be using same inventory (and therefore the same inventory price for COGS) in both scenarios.

Also b/c LIFO Reserve = Cum. pre-tax income FIFO - Cum. pre-tax income LIFO = 0 => Cum. pre-tax income FIFO = Cum. pre-tax income LIFO

How would your answer to above change if purchase prices for Dow Chemical’s inventories are expected to increase by approximately 50% in fiscal year 2013?

Would not change. The answer to this question is driven by the LIFO reserve in 2013, and, by definition, that stays the same, at 0, regardless of how much inventory is purchased in 2013.

6. International Financial Reporting Standards do not permit the use of LIFO as a cost flow assumption for inventory

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