Debt / equity = Long term debt / Equity under FIFO and FIFO Equity = LIFO Equity + LIFO Reserve. (eq-1) Eq-1 is not very intuitive to me Is it just that we adjust inventory as ( Inv (F) = Inv(L) + LIFO reserve) so to keep equation balanced we also adjust equity by the same amount. Some of my thoughts but I’m getting lost somewhere… Equity would be affected by --> Retained Earnings – > Net Income --> COGS Is there any other explanation ? Can anybody derive eq-1 ?
Equity account is a cumulative account. That is why you need to adjust the entire equity balance by the full LIFO Reserve. You were accounting in LIFO terms, now you are switching to FIFO terms.