I am having a hard time grasping something and would like anyone that can help, help clarify so I can move on.
Can someone explain to me how to calculate the cumulative tax savings for using LIFO instead of FIFO?
For example in the CFA books, reading 17 example 2. Question 5 asks this exact question. My thought would be to use the ending LIFO reserve for 2007 and mutliply by the tax rate and add that with the ending LIFO reserve for 2008 multiplied by the 2008 tax rate. However, the solution says to use ending reserve from 2007 but change in reserve for 2008. Why are we swtiching it up here? Why not use the change for both years or the ending reserve for both years?
Also, lets say the tax rate never changed between 2007 and 2008. would the calcuation differ?