Hi all, Could someone help on the below I thought we always add LIFO reserve amt to Equty when calculating ratios such as Debt to Equity However there is one problem in CFAI book (Book 3 Page 342 Problem 5C) where the answer shows that we need to add LIFO reserve after adjusting for Tax. Can someone please tell me when we should adjust for tax and when we shouldnt. Thanks
Good point. I checked the Schweser book, which says if asked “What would the retained earnings have been had the company used FIFO valuation.” Then do adjust for taxes. if asked “How should the analyst adjust retained earnings for LIFO firm to get more meaningful ratios (as FIFO is preferred for B/S items)?” Then dont have to. Nutshell, unless required calcs there is no need for taking taxes into account. Will let experts comment on how valid is this.
all right, here is the deal. You add lifo reserve to inventory, Lifo Reserve*(Taxe rate) as deffered Tas Liability and Lifo reserve* (1-Tax) to equity to balance the balance sheet.