In one of the Kaplan problems about calculating the current ratio under both LIFO and FIFO, the answer subtracts the additional taxes paid under FIFO from cash under the initial LIFO method. However, it calculates taxes as (tax rate) * (LIFO reserve), which doesn’t make sense to me, because I thought it is the change in LIFO reserve, not the LIFO reserve itself, which is reflected on the income statement. Can someone explain this to me?
Which question is this for?
I think the question might be asking what the cumulative additional taxes paid would be if the company had used FIFO vs LIFO since inception. The change in LIFO only gives you the difference in COGS for the financial period and not since inception.
Yep, that’s it. Thanks.