I thought it would just be something like the EBT after converting to FIFO? CFAI has it being the LIFO reserve(1-tax rate)? Why would that be? Mind is not working.
It’s the cumulative extra income you’ll have because you have lower COGS under FIFO than LIFO. That extra money will also be charged extra tax (i.e. less deduction because your COGS is lower), that’s why it shows up as being after-tax.
The extra sales minus the taxes paid on the sale?
Guy above me said it better.
Thanks, I think it makes sense.
I was having a hard time drawing the connection between LIFO reserve and the “cumulative extra income.” Basically the LIFO reserve is the extra inventory that would be on your balance sheet had you used FIFO. That is the same amount that would not be in your COGS if you were using FIFO. Therefore increasing your income by that amount. Take the after tax of that amount and you have what is added to retained earnings.
I would imagine a balance sheet.
When you adjust to fifo, the inventory in the asset side would be adjusted upward by lifo reserve
in the right hand side you adjust upward your tax liability (by lifo reserve *tax)
so to make it balance, retained earnings in d equity side will be adjusted upward by (lifo reserve * (1-tax))
Now they are balance
the adjustment in retained earnings and DTL is cummulative effect of having lower cogs over the years which means higher net income (a part goes to tax to become dtl, the remainder you keep as retained earnigs) if you use FIFO rather than LIFO
Retained earnings - Add LIFO Reserve net of tax. (when you were using LIFO you had lower income)
When changing from LIFO to FIFO our NI will increase by change in LIFO reserve * (1-TR), right?
yes.