FIFO Assets

CFA Level II
#1

Hi guys,

I had always thought FIFO CURRENT ASSETS = LIFO CURRENT ASSETS + (1- t) (ENDING RESERVE). I just did a mock where the solution was FIFO CURRENT ASSETS = LIFO CURRENT ASSETS + ENDING RESERVE. Is there a reason why we would not multiply ending reserve by (1 -t.)?Also does anyone know if there is an errata for BSAS exam? Cheers

#2

FIFO CURRENT ASSETS = LIFO current assets + Ending LIFO Reserve (increase inventory) - Current year Tax rate x (End LIFO Reserve - Begin LIFO Reserve - thus change in LIFO Reserve) (to decrease cash in amount of more tax paid on higher FIFO earnings).

#3

Flashback, how does equity change when converting from LIFO to FIFO ? Thanks.

#4

1.Current year

FIFO Equity = LIFO Equity + (Change in LIFO Reserve)(1-T).

Since we have change in net earnings due to lower COGS amount net of tax

Where:

change in LIFO reserve = Ending LIFO Reserve - beginning LIFO resreve

Use current year tax rate.

  1. Prior year if FIFO applied instead of LIFO you have also adjustment in beginning balance of retained earnings.

Retained earnings adjustment: Beginning LIFO Reserve (1-T) add to equity.

Use prior year tax rate if differs.

#5

Doesn’t the change in fifo inventory have an effect on FIFO equity as well?

#6

Just to be clear here, FIFO Assets = LIFO Assets + Ending LIFO Reserve - the Cumulative Tax Savings present in the Ending LIFO reserve

If the tax rate hasn’t changed during the period presented in the financial statements, then it’s simply …

FIFO Assets = LIFO Assets + LR - LR(t)

But if the tax rate HAS changed, then you’ll need to multiply the new tax rate by the change in the LR then add it to the previous cumulative tax savings.

In the curriculum, Example 2, Question 8 in the Inventories reading has a good example of this in the calculation of ROA (needing to revise assets). The tax rates in 2006 and 2007 are 30%, but then it falls to 20% in 2008. So the cumulative LIFO tax savings in 2007 is 785, but when the tax rate falls, you apply the lower tax rate to the change in the LR then add it to the previous cumulative tax savings (3,183 - 2,617 = 566 x .20 = 113 + 785 = 898). So in this example, 2008 FIFO Assets = 2008 LIFO Assets + 3,183 - 898

#7

Thanks guys, have no idea why the BSAS exam does not take into account impact of tax rate on LIFO Reserve? Thanks for your feedback

#8

Hi, can you breakdown why we have to - cumulative tax savings present in ending lifo reserve?