I haven’t seen LIFO reserve term mentioned anywhere in the curriculum. Did you guys see it? I saw this question where company is going from LIFO to FIFO. What would be the FIFO ending inventory and FIFO after tax profit, given the following information about LIFO. Year-end inventory: $22,000 LIFO reserve: $4,000 Change in LIFO reserve: $1,000 LIFO cost of goods sold: $18,000 After-tax income: $2,000 Tax rate: 40% Does anyone know how to calculate this?
this is not in the inventories chapter (i don’t know why), it’s in that last chapter of FRA which is called financial standards convergence, or something like that? Anyway, from memory, Ending Inventory (FIFO) = Ending Inventory (LIFO) + LIFO reserve so FIFO EI = $26,000 FIFO Profit = LIFO Profit + (change in LIFO reserve x (1-t)) = $2600 under LIFO, COGS is higher, so therefore profits are lower. (this all assumes rising prices by the way – does anyone know what happens to the LIFO reserve when prices are falling? can it be negative?)
So what exactly is LIFO reserve? Is it a type of account like inventory? How and where all is it reported? How is the change calculated? – Is it like ending LIFO reserve and beginning LIFO reserve?
It was in the inventories chapter last year. Now its in 42 I think.
Actually Lifo reserve is required to be reported in footnotes by US GAAP in order to make the conversion into FIFO possible. Basically lifo reserve = fifo ending inventory - lifo ending inventory. The change in the lifo reserve is lifo ending - lifo beginning. COGS in Fifo = COGS LIFO - Change in lifo reserve When the prices fall lifo reserve falls too. It could also mean that the company is liquidating its old inventory and not buying any new. The COGS in this case would be very low the profit high and taxes high. It’s a bad thing because then the company will have to buy at higher costs the new inventory once it has depleted its old one.