# FRA

can someone tell the logic behind the conversion of LIFO inventory to FIFO inventory by using those formulae in the notes? Like we add the closing LIFO reserve to the ending LIFO inventory to get the FIFO inventory and for getting the COGS we subtract the LIFO reserve from the COGS. Also the formula where After tax profit is calculated by adding the change in LIFO reserve(1-Tax rate) to LIFO after tax profit.

This is not thr for L1 this time.

O.o are you sure? can you provide me the link where it’s stated that it’s not for L1?

How will a link tell you that? It is most likely not there. Let’s wait for others to chime in. In case this is there, even I don’t understand this

an insight on this one? please sort this out!

its in the curriculum so I dont see why it would not be in L1

during inflationary period

Balance Sheet:

FIFO inventory = LIFO inventory + LR

FIFO deferred tax liability = LIFO deferred tax liability + LR (Tax)

FIFO retained earings = LIFO retained earnings + LR (1-Tax)

Income Statement:

FIFO COGS = LIFO COGS - ∆LR

FIFO NI = LIFO NI + ∆LR (1-Tax)

Hope it makes sense.

can you explain how we got this? I know the formulae, but cant get the intuition how they have worked these formulae.

The idea behind the adjustments is that we’re pretending that we were using FIFO all along. Had we been doing so, we would have adjusted COGS every year (by that year’s change in the LIFO reserve), Net Income every year (by that year’s change in the LIFO reserve, net of taxes, and Retained Earnings every year (by that year’s LIFO reserve, net of taxes). So this year we recognize the annual difference on the income statement, and the total, cumulative difference on the balance sheet.

The only concession we make is that we don’t really pay the difference in the taxes, so we don’t change our cash balance. We handle that with an increasing DTL (as cgy5478 showed, above) when costs are rising, or a decreasing DTL when costs are falling. (Because rising costs are the norm, we assume the net will be a DTL, so we don’t bother with DTAs).

thank you sir, and DTL because we get less profits under LIFO when prices are rising and this makes us pay less income taxes but we should have been paying more if we had used FIFO all along, am I right here?

You got it!

thank you once again.