What is a "LIFO credit"?

CFA Level II
#1

I’m reviewing FSA and in the final Schweser reading it shows a “LIFO credit” as an adjustment to net income to get normalized income. In the chapter when it talks about LIFO/FIFO it mentions how to go from FIFO COGS to LIFO, which makes sense and also about how to handle a declining LIFO reserve whether because of declining inventory quantity or declining prices. I believe I understand these concepts. However, I don’t see a “LIFO credit” mentioned anywhere. I would think that because its talking about adjusting an income statement that you might adjust FIFO COGS to LIFO, but that’s not what is being done here. Since the “LIFO credit” is subtracted out of net income, it says its a nonrecurring transaction. Does anyone know what this is?

#2

LIFO Reserve

#3

Declining LIFO Reserve means that we are used older, cheaper inventory for calculating COGS. Thus NI is overstated and this should be reduced New NI = Old NI - (change in LIFO Reserve)(1-t) Eg: If LIFO Reserve changed from $60 to $50 and old NI was say $100 New NI = 100 - (10*.6) assuming tax rate is 40% new NI is now $94 hope this helps.

#4

Thanks for the help both of you. I understand it now.