Analyzing an Inventory Footnote Disclosure Illinois Tool Works reports the following footnote in its 10-K report. The company reports its inventories using the LIFO inventory costing method.

December 31 (in millions)	2018	2017
Raw material	$523	$465
Work-in-process	161	141
Finished goods	731	703
LIFO reserve	(97)	(89)
Total inventories	$1,318	$1,220

(a) What is the balance in inventories reported on ITW's 2018 balance sheet? (b) What would ITW's 2018 balance sheet have reported for inventories had the company used FIFO inventory costing? $Answer

(c) What cumulative effect has ITW's choice of LIFO over FIFO had on its pretax income as of year end 2018?

The cumulative effect is that pretax income has decreased. LIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.

The cumulative effect is that pretax income has not changed. LIFO and FIFO are simply two different ways to account for inventories. Both methods lead to the same pretax income.

The cumulative effect on pretax income is nonexistent. The LIFO and FIFO methods of inventory accounting cause only cash flow effects, and they do not affect pretax income.

The cumulative effect is that pretax income has increased. LIFO matches more "current" inventory costs against current selling prices, thus avoiding the recognition of holding gains.

(d) Assume the company has a 35% income tax rate for years prior to 2017 and a 21% rate thereafter. ITWs LIFO reserve was $86 million at December 31, 2016. As of the 2018 year-end, how much has the company saved in taxes by choosing the LIFO over FIFO method for costing inventory?

Round your answer to one decimal place. Use a negative sign with answer, if ITW paid more in taxes by choosing LIFO. (e) What effect has the use of LIFO inventory costing had on ITW's pretax income and tax expense for 2018 only (assume a 21% income tax rate)?

Round answers to one decimal place, when applicable.

2018 pretax income: ____ by $___ millions

2018 tax income: ____ by $___ millions