Reading 15, example 2, question #8 (pg. 13) - LIFO to FIFO adjustment for Total Assets

[kowalski]

Question 8 asks to compute the Return on Assets (Net income / Average total assets).
According to the solution, the FIFO adjustment for total assets in 2008 is 67,782 + 3,183 - 898
67,782 is the LIFO total assets
3,183 is the LIFO reserve
898 is the amount of cash paid for the additional income tax
How do you get 898?
Shouldn’t the change in cash amount be equal to:
[ Change in LIFO reserve ] x [ Tax Rate ]

 

[S2000magician]

The change in cash amount should be the cumulative increase in taxes (under FIFO) since the company started using LIFO, not just the incremental amount for that year. Just as with inventory, the adjustment to cash is cumulative.
Note that in the solution to #5 you calculate the additional $898 million in taxes that would have been paid under FIFO.

 

[kowalski]

Thanks !

 

[S2000magician]

You’re welcome.

 

[onlysimon]

ok my turn now.. this is for question 5 pg 13 .
my answer would be = lifo reserve * (1-tax)
however the answer is = lifo reserve - historical tax savings.
surely this is not right?

 

[onlysimon]

..ignore. i’m reading it wrong they want historical effect, not the switching effect. subtle..