effect on EQ if we go from LIFO to FIFO

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mrb102189

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What happens to the equity level if we adjust the statements for a LIFO firm to FIFO? I know that if the environment is inflationary, that means under FIFO, ending inventory is higher and therefore COGS is lower. Is inventory a current asset or is it a part of long-term assets (equity)? And if COGS is lower, then NI and thereofre retained earnings are higher? So what’s the net effect on the equity level??
Thanks,
 
Assuming that the LIFO reserve is positive (which it most common), net income increases, retained earnings increases, equity increases.
Inventory is a current asset. It’s not equity; that’s on the other side of the balance sheet.
 
As I learned the hard way, equity will increase by the LIFO reserve * (1-T) as your gross profit would have been higher by the LIFO reserve
 
Yes, you must adjust equity historically, not only the current year. So the key inputs are LIFO reserve, current tax rate and pass years tax rates.
 
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