Answer questions 1 & 2 Exxon Mobil Corporation: Analyzing Effects of LIFO on Inventory Turnover Ratios The current assets of Exxon Mobil Corporation follow: ($ millions) 2014 2013 Current Assets Cash and Cash Equivalents $4,658 $4,913 Notes and Accounts Receivables $28,009 $33,152 Inventories: Crude oil, products and merchandise $12,384 $12,117 Materials and supplies $4,294 $4,018 Other current assets $3,565 $5,108 Total current assets $52,910 $59,308 In addition, the following note was provided in its 2014 10-K report: Inventories. Crude oil, products, and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method—LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. In 2014, 2013 and 2012, net income included gains of $187 million, $282 million and $328 million, respectively, attributable to the combined effects of LIFO inventory accumulations and drawdowns. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $10.6 billion and $21.2 billion at December 31, 2014, and 2013, respectively. Exxon Mobil reported pretax earnings of $51,630 million in 2014. What amount of pretax earnings would have been reported by the company if inventory had been reported using the FIFO costing method? Under FIFO the pretax income would be greater than the reported income of $51,630 million. Under the LIFO method, the inventory received last is dispatched first. Therefore, under increasing prices, the cost of goods sold is higher compared to FIFO method and gives lower profits. Exxon Mobil reported the cost of goods sold of $225,972 million in 2014. Compute its inventory turnover ratio for 2014 using total inventories. Inventory turnover ratio is computed by dividing the cost of goods sold by Average Inventory Cost of goods sold=$225972 million Average Inventory=$(12384+12117)/2=$12250.5 Inventory turnover ratio=225972/12250.5=18.45 times BP, p.l.c. (BP) reports its ﬁnancial information using IFRS. For the ﬁscal year 2014, BP reported the cost of goods sold of $281,907 million, beginning an inventory of $29,231 million and ending inventory of $18,373 million. Compute BP’s inventory turnover ratio for the ﬁscal year 2014. BP cost of goods sold= $28,1907 Average Inventory= ($29,231+ $18,373) / 2= $23,802 Inventory Turnover ratio= $28,1907/$23, 802= 11.84 times Compare your answers in parts b and c. BP can’t use LIFO to report under IFRS, so revise your calculations in such a way as to ﬁnd out which company has faster inventory turnover. What is meant by the statement that “2014 net income included gains of $187 million attributable to the combined effects of LIFO inventory accumulations and draw-downs”?

Answer questions 1 & 2 Exxon Mobil Corporation: Analyzing Effects of LIFO on Inventory Turnover Ratios The current assets of Exxon Mobil Corporation follow: ($ millions) 2014 2013 Current Assets Cash and Cash Equivalents $4,658 $4,913 Notes and Accounts Receivables $28,009 $33,152 Inventories: Crude oil, products and merchandise $12,384 $12,117 Materials and supplies $4,294 $4,018 Other current assets $3,565 $5,108 Total current assets $52,910 $59,308 In addition, the following note was provided in its 2014 10-K report: Inventories. Crude oil, products, and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method—LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. In 2014, 2013 and 2012, net income included gains of $187 million, $282 million and $328 million, respectively, attributable to the combined effects of LIFO inventory accumulations and drawdowns. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $10.6 billion and $21.2 billion at December 31, 2014, and 2013, respectively. Exxon Mobil reported pretax earnings of $51,630 million in 2014. What amount of pretax earnings would have been reported by the company if inventory had been reported using the FIFO costing method? Under FIFO the pretax income would be greater than the reported income of $51,630 million. Under the LIFO method, the inventory received last is dispatched first. Therefore, under increasing prices, the cost of goods sold is higher compared to FIFO method and gives lower profits. Exxon Mobil reported the cost of goods sold of $225,972 million in 2014. Compute its inventory turnover ratio for 2014 using total inventories. Inventory turnover ratio is computed by dividing the cost of goods sold by Average Inventory Cost of goods sold=$225972 million Average Inventory=$(12384+12117)/2=$12250.5 Inventory turnover ratio=225972/12250.5=18.45 times BP, p.l.c. (BP) reports its ﬁnancial information using IFRS. For the ﬁscal year 2014, BP reported the cost of goods sold of $281,907 million, beginning an inventory of $29,231 million and ending inventory of $18,373 million. Compute BP’s inventory turnover ratio for the ﬁscal year 2014. BP cost of goods sold= $28,1907 Average Inventory= ($29,231+ $18,373) / 2= $23,802 Inventory Turnover ratio= $28,1907/$23, 802= 11.84 times Compare your answers in parts b and c. BP can’t use LIFO to report under IFRS, so revise your calculations in such a way as to ﬁnd out which company has faster inventory turnover. What is meant by the statement that “2014 net income included gains of $187 million attributable to the combined effects of LIFO inventory accumulations and draw-downs”?

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Answer questions 1 & 2

Exxon Mobil Corporation: Analyzing Effects of LIFO on Inventory Turnover Ratios The current assets of Exxon Mobil Corporation follow:

($ millions) 2014 2013

Current Assets

Cash and Cash Equivalents $4,658 $4,913

Notes and Accounts Receivables $28,009 $33,152

Inventories:

Crude oil, products and merchandise $12,384 $12,117

Materials and supplies $4,294 $4,018

Other current assets $3,565 $5,108

Total current assets $52,910 $59,308

In addition, the following note was provided in its 2014 10-K report: Inventories. Crude oil, products, and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method—LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less. In 2014, 2013 and 2012, net income included gains of $187 million, $282 million and $328 million, respectively, attributable to the combined effects of LIFO inventory accumulations and drawdowns. The aggregate replacement cost of inventories was estimated to exceed their LIFO carrying values by $10.6 billion and $21.2 billion at December 31, 2014, and 2013, respectively.

Exxon Mobil reported pretax earnings of $51,630 million in 2014. What amount of pretax earnings would have been reported by the company if inventory had been reported using the FIFO costing method?

Under FIFO the pretax income would be greater than the reported income of $51,630 million. Under the LIFO method, the inventory received last is dispatched first. Therefore, under increasing prices, the cost of goods sold is higher compared to FIFO method and gives lower profits.

Exxon Mobil reported the cost of goods sold of $225,972 million in 2014. Compute its inventory turnover ratio for 2014 using total inventories.

Inventory turnover ratio is computed by dividing the cost of goods sold by Average Inventory

Cost of goods sold=$225972 million

Average Inventory=$(12384+12117)/2=$12250.5

Inventory turnover ratio=225972/12250.5=18.45 times

BP, p.l.c. (BP) reports its ﬁnancial information using IFRS. For the ﬁscal year 2014, BP reported the cost of goods sold of $281,907 million, beginning an inventory of $29,231 million and ending inventory of $18,373 million. Compute BP’s inventory turnover ratio for the ﬁscal year 2014.

BP cost of goods sold= $28,1907

Average Inventory= ($29,231+ $18,373) / 2= $23,802

Inventory Turnover ratio= $28,1907/$23, 802= 11.84 times

Compare your answers in parts b and c. BP can’t use LIFO to report under IFRS, so revise your calculations in such a way as to ﬁnd out which company has faster inventory turnover.
What is meant by the statement that “2014 net income included gains of $187 million attributable to the combined effects of LIFO inventory accumulations and draw-downs”?

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