FIFO to LIFO (Change of Cash)

CFA Level I FRA
#1

Hey Guys,

I am having a bit of trouble understanding how cash changes when we switch from LIFO to FIFO. My question is related to P.195 in Book 3 of schweser notes.

Under LIFO:

  • Cash: 20X6: $115 20X5:$95

Now we know that reserve is $100 20X6 and $90 20X5 and we have a effective tax rate of 20X6 30% and all other yars 20%

​​​Under FIFO

  • Cash: 20X6: $94 20X5:$77

So I understand how I get the $77 = $95 - (100 x 0.2), but why do we need to use a blended tax rate to get $94 =$115 - (90 x 0.29) + (10 x 0.3)? Shouldn’t I just use the $115 - ($100 x 0.3)?

Cheers,

Christoph

#2

Since the $90 LIFO reserve was built in 2015 and prior, it resulted in tax savings of $90 x .2 at the time.