items subject to LIFO and FIFO converstion

CFA Level I
#1

inventory, COGS are omitted. pretax income (F) = PI (L) + change in LIFO reserve Net income (F) = NI (L) + change in LIFO reserve* (1-tax rate) --> this formular also applies to RE and equity DTL (F) = DTL (L) + ending LIFO reserve * tax rate DTA ?? CFO (F) = CFO (L) - ending LIFO reserve * tax rate Please confirm and correct. Thanks.

#2

pretax income (f) = pretax income (l) + change in lifo reserve

#3

hopetobeat, yes, you are right. At conversion, the entire reserve goes to calculate FIFO, not only the change during the year. The change in reserve during the year comes into play when calculating year end FIFO, not when converting all inventory. NI would increase with LIFO reserve* tax rate, which all goes to RE therefore E. DTL increase by LIFO Reserve*tax rate. Conversion of LIFO to FIFO creates only DTL, not DTA (unless, maybe, some impairment o your inventory becomming obsolete and you write it down immediatelly but I guess the adjustment would need be done first in LIFO and recalculate your DTA in LIFO). You don’t create future tax deductions by converting LIFO to FIFO. Only taxes on your reserve. Never thought of CFO, but I’ll think and get back.

#4

Thanks. How about RE and equity adjustment, use LIFO reserve change or ending LIFO reserve? * tax rate or * (1-tax rate) I feel dizzy on these conversions.

#5

I am thinking: For cumulative balance adjustment (inventory, RE, equity, DTL), use ending LIFO reserve. For item on income statement (COGS, NI, pretax income,) adjustment --> use change in LIFO reserve. For CFO, Pepp’s explaination is sound. Correct?

#6

I’m thinking: using FIFO means lower COGS, higher Pretax EBT, higher taxes. Taxes are liabilities, so decreases in taxes are deducted. But you either increase DTL or decrease cash (when you pay the excess tax resulting from conversion). In either case, the entire reserve gets taxed, and depending on where you place your excess taxes, if paid that’s a decrease in assets, added back to NI under the indirect method. If DTLs are increased, than add that to NI, jst as you would do with any other liability.

#7

pepp DTL (f) = DTL (L) + (ending lifo reserve*taxrate)*tax rate i think DTL = excess income before tax, only tax once will be enough