Deferred Tax Liability - LIFO Reserve

[atomicrooster]

I know when calculating the net profit for a FIFO comparison we use the change in LIFO reserve * 1-tax rate + LIFO Net profit. However, on the Elan free mock there was a question #58, that was asking us to calculate the change in DTL if we were using FIFO. I thought we used the change in LIFO reserve to make the calculation but the test said the answer was wrong that you should just use Ending LIFO reserve. I looked through my books but did not see an example where both the Beg. & End LIFO reserve was given. What is the rule? Do we calculate the change in LIFO reserve and * by the tax rate or just used Ending LIFO reserve * tax rate?

 

[oz001]

change in LIFO reserve * 1-tax rate + LIFO Net profit is the adjustment for a single year
however when you adjust LIFO to FIFO for DTL computation you need to consider the cumulative impact for all previous years.
consider the following
1. Ending Inventory increases by the amount of LIFO reserve
2. The higher adjusted inventory implies that cumulative COGS charged on the income statements for all previous years would have been lower under FIFO by the amount of LIFO reserve (assuming rising prices)
3. the benefit of lower cogs would flow through part to equity and rest to taxes (under fifo your pretax income would have been higher and tax would have been higher as well)
specifically
[lifo reserve] * (1-tax) would flow to equity
[lifo reserve]*tax would be a DTL

 

[atomicrooster]

Wow, very clear thank you.