Dear All: Common Stock: $1 million Paid-In-Capital: $10 million Retained Earnings: $4 million Treasury Stock: $5 million Price Per Share: $15 LIFO Inventory: $500000 FIFO Inventory: $600000 Tax Rate: 30% I understand why the unadjusted P/BV is (1 mil+10 mil+4 mil-5 mil)/1.5 million shares. But why is it when calculating the adjusted P/BV, you add (change in LIFO Reserve)(1-tax rate)? I know that Net Profit(FIFO)=Net Profit(LIFO)+(change in reserve)(1-tax rate). Does that have anything to do with why equity is adjusting? -Richard
If I understand correctly, the change in the LIFO reserve is the difference between FIFO COGS and LIFO COGS: FIFO COGS = LIFO COGS - Change in LIFO Reserve Assuming an inflationary environment, FIFO COGS is less than LIFO COGS. So when you’re adjusting to FIFO, your NI will naturally increase because FIFO COGS is lower. FIFO COGS will be lowered by the change in LIFO Reserve, and you have to tax effect it to determine the amount that will actually arrive at NI. Since NI increases then, so does total equity. Hope that helps.