Question
The current asset section from The Dow Chemical Companys 2012 annual report follows. December 31 (in Millions) 2012 2011 Cash and cash equivalents $4,318 $5,444
The current asset section from The Dow Chemical Companys 2012 annual report follows.
December 31 (in Millions) | 2012 | 2011 |
Cash and cash equivalents | $4,318 | $5,444 |
Marketable securities and interest-bearing deposits | - | 2 |
Accounts and notes receivable | ||
Trade (net of allowance for doubtful receivables - 2012: $121; 2011:$121) | 5,074 | 4,900 |
Other | 4,605 | 4,726 |
Inventories | 8,476 | 7,577 |
Deferred income tax assets - current | 877 | 471 |
Other current assets | 334 | 302 |
Total current assets | $23,684 | $23,422 |
The Dow Chemical inventory footnote follows.
The following table provides a breakdown of inventories:
Inventories at December 31 (in Millions) | 2012 | 2011 |
Finished goods | $4,880 | $4,327 |
Work in process | 1,910 | 1,716 |
Raw materials | 866 | 765 |
Supplies | 820 | 769 |
Total inventories | $8,476 | $7,577 |
The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to $842 million at December 31, 2012 and $1,105 million at December 31, 2011. Inventories valued on a LIFO basis, principally hydrocarbon and U.S. chemicals and plastics product inventories, represented 29 percent of the total inventories at December 31, 2012 and 30 percent of total inventories at December 31, 2011.
A reduction of certain inventories resulted in the liquidation of some of the Companys LIFO inventory layers, increasing pretax income $91 million in 2012, $126 million in 2011 and $159 million in 2010.
1. 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 Dows industry? Explain.
2. Why does the reduction in inventory quantities caused an income increase in 2010 through 2012?
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