I have some issues which I do not understand even if I see answers. A company uses LIFO. LIFO reserve in 2002 is $90,000 and in 2001 is $85,000 Marginal tax rate is 28 percent the adjustment to 2002 retained earnings when conversion is made to FIFO is $61,200 ($90,000*(1-0.28)) but I think, we have to consider 2001and 2002 togehter like this $90,000*(1-0.28)+$85,000(1-.28) because retained earning should be reflected cululative effect. can anybody answe for this question?
the lifo reserve in 2002 contains the amount from 2001 plus a difference of 5000 so basically the 2002 reserve already contains the cumulative effect that you were talking about(the lifo reserve passes through from year to year)
Really adjustment is made to COGS. COGS(F) = COGS(L) - (Reserve(E) - Reserve(B)), then NetIncome(F) = NetIncome(L) + (1-tax rate)*(Reserve(E)-Reserve(B)) Since change in retained earnings is directly linked to net income, the answer is obvious. I hope that helps.
Maratikus I don’t quite get it There is no net income in the question The way I see it If you want to switch from lifo to fifo then you have to add the Lifo reserve to the retained earnings,of course considering tax bracket What you presented would be transforming Lifo Net Income to Fifo Net Income for The Year, but to switch to retained earnings you have to consider The Cumulative effect which is actually the Lifo Reserve(If you add the changes in reserve since a point 0 when inventory was valued the same, the result is the whole reserve) Am I wrong?
I think the confusion is in the way the question was asked. Martikus explained how the income statement is affected by the adjustment, but when adjusting retained earnings, you would probabky start with reported GAAP reatined earnings, not RE as you had adjusted in the prior year, which is why you would typically adjust RE based on the year end LIFO reserve, not just the change. Also… Heaven? You’re guilty of doing something which is one of my pet peaves, so this is a suggestion to everyone guilty of this. Almost every thread in this forum is a question. Please title your post with something that notes the topic, like “question on LIFO reserve” next time so the right people look at the thread, and it doesn’t waste the time of others"