I understand the various adjustments on the asset side (increase inventory by ending lifo reserve, decrease cash by taxes on increased COGS), but I don’t quite understand the change to shareholders equity. When you go from LIFO -> FIFO, why do you add the lifo reserve (net of tax) to the stockholders equity balance? Shouldn’t you be adding the CHANGE in lifo reserve net of tax, since your cogs are going up by the CHANGE in lifo reserve?
the way i remember it is the balance statement uses lifo reserve and income statement uses change in lifo reserve
on the balance sheet side i remember the word "ICE’ which stands for inventory, cash and equity.
on the income statement its not as easy, but its cost of good sold, net income and tax.
on both sets there is one subtraction and the rest are addition. also all the lifo changtes will sum properly, so if you remember two of the three, you can figure third
hope this helps
Thanks gad4. I totally understand what you’re saying and it’s very easy just to remember to balance the equstions. I guess I’m just curious because on the income statement, the change in lifo reserve (net of tax) increases the net income, so I would’ve thought that the shareholders equity balance increased by the change in lifo reserve net of tax, which would be a lower number than the actual ending lifo reserve net of tax. THere must be something else that feeds into the equity account, so I’m just trying to figure out what that is.
things on the balance sheet are total values.
things on the income statement are changes over the year.
while im still learning i would assume that annual change is included in the equity number, but it is also including all the other changes from the previous years, hence the total lifo reserve (net of tax) in equity.
When the company has LIFO, the LIFO reserve is not a balance sheet item but just in a a note to the financial statements.
So when it changes to FIFO, it needs to add the whole LIFO reserve * (1-tax) to the balance sheet, which is the same as the change as previously it was 0.
That’s how I’m understanding it at least, correct me if I’m wrong please.
I think you add the whole LIFO reserve (multiplied by 1-t) to shareholders equity rather than the change in LIFO reserve as the LIFO reserve is a cumulative figure that builds up over the years.
If the company has been trading for 5 years say, using LIFO - then each year the equity would have been lower by the change in the LIFO reserve x 1-t - so when calculating the FIFO based shareholders equity, you have to account for each cumulative year…hence you use the whole number, rather than the change.
That. Put much more eloquently than I have
Balance Sheet includes total values, so we must add total LIFO Reserve net of tax to Equity