Going through FRA, I have come up with the topic of conversion from LIFO to FIFO.
I understand the formulas where:
- Net income increases by the increase in the LIFO reserve account * (1- Tax rate)
- Retained Earnings increases by the LIFO reserve account * ( 1 - Tax rate).
However, if " Retained earnings (RE ) is the amount of net income left over for the business after it has paid out dividends to its shareholders·, how can be the increase in Retained Earnings be higher than the increase in net income ? I understand that RE increases by the net Increase in Assets (Inventories- decrease in cash) but I don’t see the reason why it can be higher than the increase in net income.
Thank you