Adj for inventory - lifo reserve added to NI??

CFA Level II
#1

So when we convert from LIFO to FIFO by adding the lifo reserve, it raises the assets and equity. How does this affect the ROE ratio? Shouldn’t it decrease? CFAI says to add lifo reserve tax adj to NI as well and ROI actually goes up? Or do the COGS go down when we apply FIFO and thus NI increase? #$@% accounting

#2

“Or do the COGS go down when we apply FIFO and thus NI increase?” Yes, when you go from LIFO to FIFO, assuming that you’re in an inflationary environment, your NI will go up, because your COGS will decrease (because you’re now using the cheaper, older FIFO goods as opposed to the more expensive LIFO goods).

#3

sweet…thanks dude

#4

Good luck on the 6th.

#5

i thought we use LIFO on IS. CPK help

#6

This is a specific question about the impact of the COGS change on the Gross Profit Margin, or some such thing. So make the adjustment - recalc. the GPM and move on. Yeah - it is usual to do move the LIFO Reserve onto the Assets. But if a tax rate is provided - then move LIFO Reserve * T to DTL and LIFO Reserve * (1-T) to the Equity section. COGS LIFO - Change in LIFO Reserve = COGS FIFO. Recalculate the Gross Profit Margin. Yes, LIFO COGS and FIFO Balance sheet is good - but this is a question where they are asking to know what the impact is. Also it is going to be a very rare question that they make you move to DTL and Equity as stated above - and also tell you that the DTL is not expected to reverse - which means that the entire DTL is now equity.

#7

CP, Awesome explanation dude. Gags

#8

Gags Wrote: ------------------------------------------------------- > CP, > > Awesome explanation dude. > > Gags Seconded! Thanks CP! Time to get out my revision notes and copy that explanation down!

#9

Are we to assume that the impact on NI will definitely be stronger than the impact on equity, so as to say that ROE will always increase when doing a LIFO -> FIFO adjustment?