FSA: LIFO vs FIFO

CFA Level II
#1

when change from LIFO to FIFO, inventory increase by LIFO reserve, and no impact on liability. I think so the equity+R/E will increase by LIFO reserve. why the increase is actually LIFO reservy * (1-tax)? Thanks.

#2

What is the Lifo reserve? Well let us assume rising inventory costs for explanation purposes. Lifo reserve is basicly the amount that was expensed that would have been expensed had you been using FIFO. Agree? Well guess what, the fact that you had indeed incurred that expese saved you tax, so to reverse it you gota account for that. So say your lifo reserve is $100, meens overall you oncured $100 cost you would not have incurred under fifo. You are tempted to simply add that to equity, but wait. If you remove that cost from your income statemnt, your taxes are gona go up. By how much? by 100*tax so in esense, rather than gain the 100, you only gained 100*(1-t) by going from Lifo to Fifo…

#3

pretty much right on- i thought you didnt do FSA yet gulf? Or you just know this from level 1 you genius

#4

Level 1, but took me a min to remmber Man Dr. Andrew Holmes from Schweser sais there are 3 reasons prepared candidates fail level II. 1Not enough practice. 2Poor time management 3Not enought FSA studying. I think I will go ahead and bubble 3 in the survey lol

#5

Another way to think of it is LIFO reserve is the amount that your inventory would be revalued at if you switched to FIFO. (use $100 like the above example and tax of 30%). Your inventory would increase by 100 (an asset increase). This throws A=L+OE out of balance and you have to adjust your cash by the amount of taxes you would have paid using FIFO which is (100*.3). To fully balances you would then have to add this net adjustment to retained earnings under equity on the other side of the equation to balance which is: 100 (to inventory) - 100*(.30) (out of cash) = 100*(.7) or 100(1-t)

#6

I agree with the above. @hw0799 The liabilities actually increase by the amount of deferred tax liability which arises as you “revalue” assets.

#7

Thanks for everybody. perimel Wrote: ------------------------------------------------------- > I agree with the above. > > @hw0799 > > The liabilities actually increase by the amount of > deferred tax liability which arises as you > “revalue” assets.