Current ratio in FIFO

[kgsgp]

Hi
I notice that current ratio CR = (CR + LIFO Reserve) / CL when converting from LIFO to FIFO.
However, should it not be = (CR+LIFO Reserve (1-tax rate)) / CL ?
I understand we need to also adjust Cash when converting from LIFO to FIFO. Reduction from cash = LR * tax rate.
Please can anyone clarify… thanks a lot…
Kumar

 

[meijiblack]

the “+ lifo reserve” is from the inventory when you go from lifo to fifo. dont think cash changes

 

[Bad5shah]

kgsgp wrote:
Hi
I notice that current ratio CR = (CR + LIFO Reserve) / CL when converting from LIFO to FIFO.
However, should it not be = (CR+LIFO Reserve (1-tax rate)) / CL ?
I understand we need to also adjust Cash when converting from LIFO to FIFO. Reduction from cash = LR * tax rate.
Please can anyone clarify… thanks a lot…
Kumar

 

[SpyAli]

There can be two scenarios.
If tax savings are assumed to be paid out immediately, then cash would decrease by LR*t. Inventories would increase by LR. The net impact on Current Assets would be an increase of LR (1-t). Current liabilities would remain same. So CR would increase.
If tax savings are assumed to be deferred until a later date, then current liabilities would increase by LR*t. Inventory would increase by LR. As both the numerator and the denominator are headed in the same direction so you will determine which one is changing more in percentage terms. If percentage change in denominator is greater than the numerator, it will dominate and current ratio will be lower.
Now the million dollar question is which method you are going to go with on the exam day???

 

[rawraw]

kgsgp wrote:
Hi
I notice that current ratio CR = (CR + LIFO Reserve) / CL when converting from LIFO to FIFO.
However, should it not be = (CR+LIFO Reserve (1-tax rate)) / CL ?
I understand we need to also adjust Cash when converting from LIFO to FIFO. Reduction from cash = LR * tax rate.
Please can anyone clarify… thanks a lot…
Kumar

To get Inv(Fifo), you just add Lifo reserve + Inv(Lifo). We aren’t selling anything, just making the current assets measured the same way.