Mock V2 - Q23

There is this answer that bothers me… Lifo reserve = 85 question 23 asks about the what happens to the total asset turnover and ROE for the lifo reserve adjustment? My question is, where is the "difference betw. the full amount of 85 and 54 (85*(1-T), with T=35%) ? For their calculations they increase total assets by 85, which makes sense… BUT NI they say increases by 54 as well as equity… Where is the difference of 31 that was paid in taxes?

The COGS will be reduced by 85*(1-35%)=54 You can see Revenue - COGS -General expense -Interest --------- =EBT *(1-t) ---------- =NI (1) If COGS is reduced by 85, then (EBT-85)*(1-T)=NI (2) NI(1)-NI(2)=85*(1-T).

thanks kate, my question was more assets + 85 but equity +54. this is obviously an imbalance. where is the rest on the BS?

That will be equity. :slight_smile:

taxes payable?

PLus, this question assumed that LIFO reserve didn’t change, which means the process would have been different if it HAD changed. Can anyone tell me what we should do if the reserve HAD changed?

An adjustment involving a LIFO reserve creates an increase in equity for the income, and the new taxes will create a deferred tax liability.

So summarize it… NI will be increased by 53 [Due to tax effect], and because we added 83 to COGS. Equity will be increased by 53 Deferred Tax liability increased by 29 Inventory will be increased by 83. Is this the correct adjustment? Thx !

Why would we decrease COGS by LIFO reserve? In this case, COGS is already in LIFO, so we should we decrease COGS to make it on FIFO basis? Please help…