05 reserve=90; 06 reserve=100, tax rate 06=30%, tax rate other yrs=20% So when converting statements from LIFO to FIFO: - With current ratio (numerator CA): we + LIFO reserve and - cumulative taxes from all years on LIFO reserve. This is increase in inventory and reduction of cash by taxes. - With net profit margin (numerator net income): we + change in LIFO reserve and - increase in income taxes. This is lower COGS and increase in income taxes. I understand all the calculations involved, but why for current ratio are we adding all cumulative taxes and for net income we add only 1 year taxes?
Because current ratio accounts for all current assets and liabilities on the balance sheet (cumulative), but net income on the income statement accounts for just 1 year. The net income is years past would change as well, if you were to restate all income statements since the firm came into existence.
Thanks