Mock 2 Q 23

The question asks what will happen to Total asset turnover and ROE when you make the adjustments Inventory. Inventory was based on LIFO. So I understand that Lifo shoulld be changed to Fifo on the balance sheet by adding the Lifo reserve to inventory, but the answer says… The LIFO adjustment also increases net income and hence retained earnings. Adding the same amount to the numerator and denominator results in a higher return on equity ratio, because Sweet Home’s net income is smaller than its equity. I thought that COGS should be under Lifo on the income statement because these are the most recent prices and reflect a better NI from the analysts point of view. Also, I am concerned because I thought when making adjustments to financial statements we did not have to treat the IS and BS as related. I would have made the adjusting entry dirrectly to SE and not through the income statement. Am I wrong? What am I missing?

The vignette states in a not-so-obvious way that B/S uses LIFO and I/S COGS use FIFO. Therefore you had to add the LIFO Reserve to COGS.

use the search function… has been discussed here before a couple of times.