I don’t quite get the formulas below.
a) FIFO net income = LIFO net income + Change in LR x ( 1 - tax rate ) b) FIFO retained earnings = LIFO retained earnings + LR x ( 1 - tax rate )
Why is there a need to calculate the change in LR for FIFO net income but not FIFO Retained earnings ?
Remember that retained earnings is the sum of net income for every year since the beginning of forever. Therefore, the adjustment to retained earnings will be the sum of the adjustments to net income for every year since the beginning of forever: the sum of all of the changes in the LIFO reserve times (1 − t). That sum is the total LIFO reserve.