I’m a little stumped on this. The question gives you the balance sheet along with the LIFO reserve information but no tax rate, and asks you to calculate the adjusted CR. I thought you were supposed to subtract the LIFO reserve net of tax from cash and also add it to the inventory? The question doesn’t provide a tax rate, and in the answer they just added it to the inventory with no adjustment to cash. Someone please explain. Thanks
Anyone?
the lifo reserve is used net of tax for either Net income, retained earnings or total assets. for calculating Current ratio simple add reserve values to inventory values and calculate the updated ratio ( I have answered this to the best of my knowledge)
Thanks for the answer. See the thing that confuses me is when do you adjust cash and when do you not? In the CFA curriculum the example the provide in reading 17 - Inventories, for adjusting from LIFO to FIFO, they adjusted cash down by LIFO Reserve x Tax.
That question on the mock didn’t provide a tax rate and just adjusted the Inventory up by LIFO Reserve, when in the CFA example the net change to current assets was LIFO Reserve (1 - Tax Rate).
Yeah CFA can be weird like that.
Generally when adjusting COGS from LIFO to FIFO, we have lower COGS, higher income, therefor we pay higher tax. So in addition to adjusting the BS for inventory accounting methods, we also need to adjust the additional tax paid to cash by deducting it.
However if the question is in a very narrow scope, you may only have to do the inventory adjustment, such as the question you referenced.
I had a mock question where I had to calculate RoA (NI / Average assets), but they didn’t use average assets, only the current year assets, because there wasn’t enough information to make the adjustment.