Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $): Cash $1,100,000 Accounts Payable $400,000 Accounts Receivable 300,000 Deferred Tax Liability 700,000 Inventory 2,400,000 Long-term Debt 8,200,000 Property, Plant & Eq. 8,000,000 Common Stock 1,000,000 Total Assets 11,800,000 Retained Earnings 1,500,000 LIFO Reserve at Jan. 1 600,000 Total Liabilities & Equity 11,800,000 LIFO Reserve at Dec. 31 900,000 Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40 percent. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to: A) 4.06 B) 3.63 C) 3.73 D) 4.18 Your answer: D was incorrect. The correct answer was A) 4.06 With FIFO instead of LIFO: Inventory would be higher by $900,000, the amount of the ending LIFO reserve. Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000. Cumulative retained earnings would be higher by (1 - 0.40)($900,000) = $540,000. So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000/$3,040,000 = 4.06. For calculating the difference in profit here ending lifo reserve has been considered. dont we consider the change the lifo reserve? am i missing something here??
Balance sheet is based on end of period… you only use change in LIFO reserve when calculating the changes to COGS for the period… not at a specific period of time