SO FREAKING ANNOYING that the answers are so budget. They are giving me no insight as to what the correct answer was. Cripes. Anyway, how come the LIFO Reserve adjustment wouldn’t result in a lower ROE? My thinking was that the adjustment would be added to Assets and the offset would be adding to Equity, so ROE would decrease. From the answer it seems that something would flow through to the balance sheet, but why is that? I thought that FIFO COGS would be maintained because it is a more appropriate value. Any help would be appreciated. Thanks!
Wait, what? FIFO COGS is more appropriate than LIFO COGS? That goes against everything I’ve learnt.
we talking COGS or inventory here? FIFO COGS = LIFO COGS - change in LIFO reserve
Oops! You’re right. Sorry. My brain is fried.
I meant LIFO COGS above. But my point is - I thought that you would adjust the inventory by the LIFO reserve to get to FIFO. And I know that COGS is essentially a plug, but aren’t you meant to leave COGS as LIFO because that reflects the accurate economic cost? How do we know when we are meant to adjust COGS and when we aren’t? I guess that’s my real question. I thought that on a “synthesis” question you would use LIFO COGS and FIFO Inventory, even though they won’t match up flow-wise.
why do you add the lifo reserve back to assets and equity? they meant to add the lifo reserve on an off-balance sheet basis, so neither earnings or equity or assets are changed.