In the following question, if retained earnings needs to be increased for LIFO liquidation, what is other side transaction to make balance sheet to balance? Are the inventories increased? ---------------------- Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements, you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36 percent, what will be the adjusted value of retained earnings? A) $1,980,000. B) $1,820,000. C) $1,855,000. D) $1,945,000. Your answer: A was correct! The adjustment to retained earnings will be: $125,000*(1-.36).
Inventory increases by 125,000, and cash decreases by 45,000.