The Dow Chemical inventory footnote follows.

Required

a. What inventory costing method does Dow Chemical use? As of 2012, what is the effect on cumulative pretax income and cash flow of using this inventory costing method? (Assume a 35\% tax rate.) What is the effect on 2012 pretax income and cash flow of using this inventory costing method?

b. Compute inventory turnover and average inventory days outstanding for 2012 (2012 cost of goods sold is \(\$ 47,792\) million). Comment on the level of these two ratios. Is the level what you expect given Dow's industry? Explain.

c. Explain why a reduction of inventory quantities increased income in 2010 through 2012.

Transcribed Image Text:

December 31 (In millions) Cash and cash equivalents. Marketable securities and interest-bearing deposits. Accounts and notes receivable Trade (net of allowance for doubtful receivables-2012: $121; 2011: $121).... Other.... Inventories. Deferred income tax assets-current. Other current assets.. Total current assets 2012 2011 $ 4,318 $ 5,444 - 5,074 4,605 8,476 877 334 $23,684 4,900 4,726 7,577 $23,422 471 302 2