Calculation of Total Asset under FIFO after converting from LIFO

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ishwar_jindal

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Can anyone look at Example 2 in reading 16, question # 8. The book ask to calculate net profit margin under LIFO and FIFO. Since the figures given in question are all LIFO so LIFO net profit margin in easy but while calculating net profit margin for FIFO the CFAI book are used below formula for calculation of total assets
Total Asset (FIFO) = Total Asset (LIFO) + LIFO Reserve - Tax on LIFO Reserve.
As per my understanding the increase in COGS in FIFO from LIFO attract extra tax. So the loss of cash asset (i.e. income tax) should be calculated on the amount by which COGS has reduced i.e. Total Asset (FIFO) should be below
Total Asset (FIFO) = Total Asset (LIFO) + LIFO Reserve - Tax on (Change in LIFO Reserve).
where (Change in LIFO Reserve) = COGS(LIFO) - COGS (FIFO)
I cannot copy the example 2 from book as it is very long but can anyone look at question 8 in example 2 in reading 16. As per my understanding the claculation for Total Asset (FIFO),2007 should be = 56132 + 2617 - 30% of 214 (i.e. 2617-2403 = 214) = 58,684.2 and not 57,964 as per book.
 
Change in LIFO reserve is (ending LIFO reserve - beginning (PY) LIFO reserve), and you have deduct lower paid tax amount from total assets, concrete from cash position when you convert FS to FIFO from LIFO. For current year, you have to deduct savings from lower paid taxes from assets (cash) by multiplying tax rate with change in LIFO reserve.
There are also previous year adjustment in lower tax amount what you have to deduct from PY Asset position and is caluculated as PY (beginning) LIFO reserve x % Tax. Try in this manner and check wether your total asset balance is correct.
Watch out, in almost all examples there are different tax rates in CY and PY.
The bottom line is total change in ROA ratio after LIFO to FIFO conversion. Since ROA change includes all changes from LIFO to FIFO, if you are able to calculate correct ROA after conversion you wold be able to calculate all other ratios after conversion (some of them only includes one change f.ex in COGS etc).
Thus, my advice would be to practice adjusting ROA after LIFO conversion.
 
Total Asset (FIFO) = Total Asset (LIFO) + LIFO Reserve - Tax
The tax is [(LIFO reserve last year)(last year’s tax rate)+(Change in LIFO reserve)(New tax rate)]
 
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