LIFO / FIFO Question

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THEROCK

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Smith Corp uses LIFO inventory accounting. The financial statements for 20x3 record the following:

2002 LIFO INV = $350,000; 2003 LIFO INV$420,000
2002 LIFO RESERVE = $50,000; 2003 LIFO RESERVE = $60,000

If the company had instead used FIFO inventory accounting, the effects on COGS and Retained earnings in 20x3 would be closest to:

COGS Retained earnings
a. 10,000 higher 36,000 lower
b. 6,000 lower 6,000 higher
c. 6,000 higher 6,000 lower
d. 10,000 lower 36,000 higher

Already know under FIFO, COGS will be lower and Retained earnings higher under a rising price environment all else being equal. At least choice A and C can be eliminated. Please help to derive mathmatically the answer which is choice D.
 
I'm going to either need one COGS or annual purchases...
 
adjustment to COGS FIFO (from LIFO) = minus the increase in LIFO reserve / plus the decrease in LIFO reserve (from year 2002 to 2003)

On Balance sheet thefollowing adjustment should be made:
* Inventory FIFO = Inventory LIFO + LIFO reserve on assets side,

and on another side of BS:
* Deferred liabilities = LIFO reserve * tax rate
* Retained earnings = LIFO Reserve * (1-tax rate)
 
Sorry...left out small detail:

Smith Corp pays income tax at 40%
 
.... small detail that answers half the question
 
Answer is D... I arrived at 36,000 by just mulitply the LIFO Reserve by .60...When in doubt try 40% - 30% tax rate as those are the most common i have seen.
 
haha, silly guys, you simply can use "excluding method". That is :the A,B,C,is not right,so the D must be right. The other detail information is not needed.
 
actually i have a question about the GOCS after change LIFO to FIFO and the retain earnings.
See for the example above, the GOCS just lower by 10000, but why retained earnings up 36000? is that because of the historical LIFO reserved got paid back at this point of time? even GOCS at current fiscal year just lowered by limited amount?
 
stop smoking the "happyleaves"

It's COGS not GOCS.

And the answer is income taxes account for the difference.
 
Oops, sorry.
I understand it's the LIFO reserve * (1-T) . this extra retain earnings is part of the NI right? I am just curious, as for only the COGS part, only lowering by 10000 before tax, and for retain earning , shouldn't it be 10000*(1-T) ? Is that they adjust the retain earning with the value reserved by LIFO all at once from the very beginning?
 
The issue here is that if the company had used FIFO instead of LIFO, EACH year's COGS would have been slightly different, and the amount of the difference in 2003 would have been $10,000.

Retained earnings would reflect the CUMULATIVE effect of having used FIFO all along, which in essence is the aftertax amount of the LIFO reserve, not just the current year COGS difference.



Edited 1 time(s). Last edit at Tuesday, November 14, 2006 at 04:22PM by Super I.
 
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