FIFO LIFO Ques

CFA Level I FRA
#1

Hey guys,

If iw ere to change FIFO to LIFO

  • that would reduce cogs and increase income by the change in lifo reserve x (1-t)
  • the balance sheet inventory will increase by the lifo reservece + (1-t)

however, theres a disparity where my net income increase is not the same as my inventory increase.

wouldn’t this create a disparity in my formula asset - liability = equity since income flows into retained earnings?

#2

Asset:

  • Inventory increases by LIFO Reserve

Equity:

  • Retained earnings increase by LIFO Reserve × (1 - t)

Liability:

  • If taxes on adjustment is not paid, Tax liabilities increase by LIFO Reserve × t

Note: If taxes paid, then reduce Cash by LIFO Reserve × t

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#3

When costs are rising (the usual situation), changing from FIFO to LIFO will increase COGS and decrease net income.

#4

Assets increase by the full LIFO reserve after tax. You would now need to deduct the cash by the loss in the tax saving, I believe?

E: I just saw your statement at the bottom, sorry

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