Deere and CNH Global: performance effects of inventory accounting choice*
Deere and CNH Global compete against each other as manufacturers in the global market for agricultural and construction equipment. Both companies operate finance subsidiaries in order to extend credit to their dealer networks and end-customers. Deere is the larger of the two companies (1.6X greater in sales, 1.4X in assets, and 1.9X in employees). CNH is headquartered in the Netherlands, but like Deere it follows US GAAP and is traded on the New York Stock Exchange.
Despite the obvious similarities between the two companies, they have chosen different cost-flow assumptions for inventory, as revealed in the disclosures shown below.
Required
(a) What is CNH’s policy regarding inventory valuation and cost-flow assumptions?
(b) What is the balance in CNH’s inventory account at the end of 2010, both in dollars and as a percentage of total assets?
(c) What is Deere’s policy regarding inventory valuation and cost-flow assumptions?
(d) What is the balance in Deere’s inventory account at the end of 2010, both in dollars and as a percentage of total assets?
(e) What would the year-end inventory amounts be for Deere if they used the FIFO cost assumption for 100% of its inventories?
(f) Calculate inventory turnover for CNH.
(g) Calculate inventory turnover for Deere using the financial data as reported.
(h) Calculate inventory turnover for Deere, assuming that it used FIFO on 100% of its inventories.
(i) Review the figures above. How does Deere compare to CNH on this measure when you use the data as originally reported? How do they compare when you recast Deere’s financial data on the basis of FIFO?
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