General Motors Case Study

General Motors Case Study

General Motors are considered to be among the largest motor vehicle manufacturing companies in the world. It based in the United States and has several assembling plants found in the USA, Canada, and other countries. The company mostly deals with trucks and automobiles, engines, and automobile components, and it also offers financial services (Bayou & De Korvin, 2008). Inventories make up a considerable portion of their asset base. The management of these inventories can be challenging for the company and may affect General Motors’ ability to create value for its shareholders. It is essential to measure these inventories as they may affect the performance of the firm.

The proportion of General Motors Assets That Are Inventories

Inventory assets are those that can be sold to earn revenue for the company. From the inventory on GMC inventory measurement and management. Several assets can be considered to get inventoried for the year 2003. The first asset is the cash and cash equivalents, which is worth $32554 (Bayou & De Korvin, 2008). The second asset is other marketable securities that are worth $22215 (Bayou & De Korvin, 2008). The total cash and marketable securities total to $54769 (Bayou & De Korvin, 2008). Other assets include finance receivables, which amount to $173137, loans that have been held for sale at $ 19609, accounts and notes receivable that are fewer allowances (Bayou & De Korvin, 2008). There are also assets of the discontinued operation, differed income taxes, net equipment on operating leases minus the accumulated depreciation. Other assets include equity in net assets of non-consolidated affiliates, property, intangible assets, and other assets. The total receivable for the asset inventory is $448,507 (Bayou & De Korvin, 2008). The total for automotive stocks is $161,785 (Bayou & De Korvin, 2008).

Reasons For Two Distinctive Balance Sheets By General Motors

A company must have a balance sheet as it helps in reporting the financial status of the firm on a particular date. A balance sheet also summarizes the firm’s assets, shareholders’ equity, and liabilities. The reason why General Motors have two distinct balance sheets is to differentiate the automotive assets from other assets. It is because the company mainly deals with automotive. Hence, it requires a specific balance sheet to track its sales and revenues and detect when the business is suffering losses (Conley, Natarajarathinam, Lu, & Rangan, 2019). The consolidated balance sheet deals with securities of the firm, including cash and cash equivalents. The supplemental information to the consolidated balance sheets provides more details on the assets of the firm, its labilities, and stockholders’ equity. These two balance sheets are essential as they indicate how quickly the assets can get converted into cash. The liabilities get listed in order of their payment priority.

Cost Allocation

Cost allocation refers to the process of identifying, aggregating, and assigning costs to cost objects. Cost object refers to single assets that a company wants to measure its value separately. The reasons as to why many companies use cost allocation to account for their inventories is because it helps to spread costs among inventory items or departments (Guajardo & Rönnqvist, 2016). It is also useful in the calculation of profits at the subsidiary or departmental level, which in turn gets used as the basis for funding other activities or awarding bonuses. General Motors uses the activity-based costing cost allocation method for its inventories. This method of cost allocation enables GM to determine the actual cost of all the assets it has. It also identifies those that will generate more money from those that might lead to loss of funds (Chuang & Chiang, 2016). It is also a more accurate method of cost management.

FIFO Inventory Method Instead of LIFO

There are different methods for creating an inventory. The LIFO and FIFO method is among the most common methods of developing a balance sheet. In its stocks, General Motors used the LIFO method, which is assumed that the price that GM pays for the stock increases with time. However, had the company used the FIFO method, this would not have been the case as the balance sheet takes into account the current market value of the product, unlike the LIFO method, which permits income manipulation (Fawzi, Kamaluddin & Sanusi, 2015). The income statement would be different as LIFO understates inventory. For example, General Motors reported its stocks at a fraction of the replacement cost. Under FIFO, the purchases of the assets do not affect the net income of the company.

T-account

Inventories 2003

Inventories 2002

1. raw material inventory = half of the total cost of manufacturing inventory

manufacturing inventory = 0.5* 10980=$5490

It would get recorded on the balance sheet journal.

1. Accounts payable is liabilities on balance sheet

Inventories 2003

Inventories 2002

The likely amount made to be paid in 2003 is $361,960, and this falls under the journal of balance sheet.

The ROE (Return On Equity)

PSA Peugeot

ROE= ==0.1319 =13.19%

Average inventory holding period ===57.71 days

GM

ROE=20.21%

The average inventory holding period is 34.79 days

LIFO Liquidation in 2003

From the inventory provided by General Motors, it is evident that there is some liquidation that occurred in that year. It occurred as the company sold most of its older assets in its inventory. Liquidation in GM indicates that the company sold more goods than it bought in the year 2003. This event affected the company’s income statement as it led to the distortion of the firm’s operating tax. It means that the company made very few purchases or produced few merchandises, which led to it selling some of its older inventory. The sale of inventory that is beyond the recent purchase gets referred to as liquidation. The process of liquidation leads to a decrease in the cost of goods sold, which in turn makes the gross profit to rise. It is the case for General Motors as the company recorded more profits in the year 2003 compared to previous years. It leads to the generation of income that can be taxed (Harris & Ananthanarayanan, 2019). The effect of LIFO liquidation is material as it only occurs in case the company requires more cash flow than expected. It also occurs when there is a sudden increase in the demand for goods sold by the company (Acharya, Schaefer & Zhang, 2015). It is material because it happened when the company had no recent inventory, which may have been due to failure in buying or a problem with production.

Conclusion

The inventory in general motors indicates that the realizable value is the selling price of its assets in the usual course of business. The inventory considers the economic and general market conditions. LIFO liquidation occurs in many companies, and it uses up the profits of a company as it attracts high taxation from the government due to the high gross revenue it causes. General Motors can also use the FIFO inventory as it offers the real value of assets, unlike the use of LIFO, which allows for income manipulation.

References

Acharya, V. V., Schaefer, S., & Zhang, Y. (2015). Liquidity risk and correlation risk: A clinical study of the General Motors and Ford Downgrade of May 2005. The Quarterly Journal of Finance, 5(02), 1550006.

Bayou, M. E., & De Korvin, A. (2008). Measuring the leanness of manufacturing systems—a case study of Ford Motor Company and General Motors. Journal of Engineering and Technology Management, 25(4), 287-304.

Chuang, C. H., & Chiang, C. Y. (2016). Dynamic and stochastic behavior of coefficient of demand uncertainty incorporated with EOQ variables: An application in finished-goods inventory from General Motors׳ dealerships. International Journal of Production Economics, 172, 95-109.

Conley, K., Natarajarathinam, M., Lu, W., & Rangan, S. (2019). Effect of Accounting Policies on Effectiveness of Inventory Management Strategies. Engineering Management Journal, 1-11.

Fawzi, N. S., Kamaluddin, A., & Sanusi, Z. M. (2015). Monitoring distressed companies through cash flow analysis. Procedia Economics and Finance, 28, 136-144.

Guajardo, M., & Rönnqvist, M. (2016). A review of cost allocation methods in collaborative transportation. International transactions in operational research, 23(3), 371-392.

Harris, P., & Ananthanarayanan, U. (2019). Inventory Costing: A Comprehensive Case Study. Review of Business & Finance Studies, 10(1), 15-24.

General Motors Case Study

Student’s Name

Institutional Affiliation

General Motors Case Study

General Motors are considered to be among the largest motor vehicle manufacturing companies in the world. It based in the United States and has several assembling plants found in the USA, Canada, and other countries. The company mostly deals with trucks and automobiles, engines, and automobile components, and it also offers financial services (Bayou & De Korvin, 2008). Inventories make up a considerable portion of their asset base. The management of these inventories can be challenging for the company and may affect General Motors’ ability to create value for its shareholders. It is essential to measure these inventories as they may affect the performance of the firm.

The proportion of General Motors Assets That Are Inventories

Inventory assets are those that can be sold to earn revenue for the company. From the inventory on GMC inventory measurement and management. Several assets can be considered to get inventoried for the year 2003. The first asset is the cash and cash equivalents, which is worth $32554 (Bayou & De Korvin, 2008). The second asset is other marketable securities that are worth $22215 (Bayou & De Korvin, 2008). The total cash and marketable securities total to $54769 (Bayou & De Korvin, 2008). Other assets include finance receivables, which amount to $173137, loans that have been held for sale at $ 19609, accounts and notes receivable that are fewer allowances (Bayou & De Korvin, 2008). There are also assets of the discontinued operation, differed income taxes, net equipment on operating leases minus the accumulated depreciation. Other assets include equity in net assets of non-consolidated affiliates, property, intangible assets, and other assets. The total receivable for the asset inventory is $448,507 (Bayou & De Korvin, 2008). The total for automotive stocks is $161,785 (Bayou & De Korvin, 2008).

Reasons For Two Distinctive Balance Sheets By General Motors

A company must have a balance sheet as it helps in reporting the financial status of the firm on a particular date. A balance sheet also summarizes the firm’s assets, shareholders’ equity, and liabilities. The reason why General Motors have two distinct balance sheets is to differentiate the automotive assets from other assets. It is because the company mainly deals with automotive. Hence, it requires a specific balance sheet to track its sales and revenues and detect when the business is suffering losses (Conley, Natarajarathinam, Lu, & Rangan, 2019). The consolidated balance sheet deals with securities of the firm, including cash and cash equivalents. The supplemental information to the consolidated balance sheets provides more details on the assets of the firm, its labilities, and stockholders’ equity. These two balance sheets are essential as they indicate how quickly the assets can get converted into cash. The liabilities get listed in order of their payment priority.

Cost Allocation

Cost allocation refers to the process of identifying, aggregating, and assigning costs to cost objects. Cost object refers to single assets that a company wants to measure its value separately. The reasons as to why many companies use cost allocation to account for their inventories is because it helps to spread costs among inventory items or departments (Guajardo & Rönnqvist, 2016). It is also useful in the calculation of profits at the subsidiary or departmental level, which in turn gets used as the basis for funding other activities or awarding bonuses. General Motors uses the activity-based costing cost allocation method for its inventories. This method of cost allocation enables GM to determine the actual cost of all the assets it has. It also identifies those that will generate more money from those that might lead to loss of funds (Chuang & Chiang, 2016). It is also a more accurate method of cost management.

FIFO Inventory Method Instead of LIFO

There are different methods for creating an inventory. The LIFO and FIFO method is among the most common methods of developing a balance sheet. In its stocks, General Motors used the LIFO method, which is assumed that the price that GM pays for the stock increases with time. However, had the company used the FIFO method, this would not have been the case as the balance sheet takes into account the current market value of the product, unlike the LIFO method, which permits income manipulation (Fawzi, Kamaluddin & Sanusi, 2015). The income statement would be different as LIFO understates inventory. For example, General Motors reported its stocks at a fraction of the replacement cost. Under FIFO, the purchases of the assets do not affect the net income of the company.

T-account

Inventories 2003

Inventories 2002

1. raw material inventory = half of the total cost of manufacturing inventory

manufacturing inventory = 0.5* 10980=$5490

It would get recorded on the balance sheet journal.

1. Accounts payable is liabilities on balance sheet

Inventories 2003

Inventories 2002

The likely amount made to be paid in 2003 is $361,960, and this falls under the journal of balance sheet.

The ROE (Return On Equity)

PSA Peugeot

ROE= ==0.1319 =13.19%

Average inventory holding period ===57.71 days

GM

ROE=20.21%

The average inventory holding period is 34.79 days

LIFO Liquidation in 2003

From the inventory provided by General Motors, it is evident that there is some liquidation that occurred in that year. It occurred as the company sold most of its older assets in its inventory. Liquidation in GM indicates that the company sold more goods than it bought in the year 2003. This event affected the company’s income statement as it led to the distortion of the firm’s operating tax. It means that the company made very few purchases or produced few merchandises, which led to it selling some of its older inventory. The sale of inventory that is beyond the recent purchase gets referred to as liquidation. The process of liquidation leads to a decrease in the cost of goods sold, which in turn makes the gross profit to rise. It is the case for General Motors as the company recorded more profits in the year 2003 compared to previous years. It leads to the generation of income that can be taxed (Harris & Ananthanarayanan, 2019). The effect of LIFO liquidation is material as it only occurs in case the company requires more cash flow than expected. It also occurs when there is a sudden increase in the demand for goods sold by the company (Acharya, Schaefer & Zhang, 2015). It is material because it happened when the company had no recent inventory, which may have been due to failure in buying or a problem with production.

Conclusion

The inventory in general motors indicates that the realizable value is the selling price of its assets in the usual course of business. The inventory considers the economic and general market conditions. LIFO liquidation occurs in many companies, and it uses up the profits of a company as it attracts high taxation from the government due to the high gross revenue it causes. General Motors can also use the FIFO inventory as it offers the real value of assets, unlike the use of LIFO, which allows for income manipulation.

References

Acharya, V. V., Schaefer, S., & Zhang, Y. (2015). Liquidity risk and correlation risk: A clinical study of the General Motors and Ford Downgrade of May 2005. The Quarterly Journal of Finance, 5(02), 1550006.

Bayou, M. E., & De Korvin, A. (2008). Measuring the leanness of manufacturing systems—a case study of Ford Motor Company and General Motors. Journal of Engineering and Technology Management, 25(4), 287-304.

Chuang, C. H., & Chiang, C. Y. (2016). Dynamic and stochastic behavior of coefficient of demand uncertainty incorporated with EOQ variables: An application in finished-goods inventory from General Motors׳ dealerships. International Journal of Production Economics, 172, 95-109.

Conley, K., Natarajarathinam, M., Lu, W., & Rangan, S. (2019). Effect of Accounting Policies on Effectiveness of Inventory Management Strategies. Engineering Management Journal, 1-11.

Fawzi, N. S., Kamaluddin, A., & Sanusi, Z. M. (2015). Monitoring distressed companies through cash flow analysis. Procedia Economics and Finance, 28, 136-144.

Guajardo, M., & Rönnqvist, M. (2016). A review of cost allocation methods in collaborative transportation. International transactions in operational research, 23(3), 371-392.

Harris, P., & Ananthanarayanan, U. (2019). Inventory Costing: A Comprehensive Case Study. Review of Business & Finance Studies, 10(1), 15-24.