LIFO Reserve Qbank question

400, increase, question, understand, 300

Can someone explain how they are using 900,000 LIFO reserve to calculate an increase in income? I understand how this will increase assets (inventory) but I do not see the correlation with increased income.

Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):

Cash
$1,100,000
Accounts Receivable
300,000
Inventory
2,400,000
Property, Plant & Eq.
8,000,000
Common Stock
1,000,000
Total Assets
11,800,000

LIFO Reserve at Jan. 1
600,000
LIFO Reserve at Dec. 31
900,000

Accounts Payable
$400,000
Deferred Tax Liability
700,000
Long-term Debt
8,200,000
Retained Earnings
1,500,000
Total Liabilities & Equity
11,800,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:

A) 4.06

B) 3.73

C) 4.18

Your answer: C was incorrect. The correct answer was A) 4.06

With FIFO instead of LIFO:

Inventory would be higher by $900,000, the amount of the ending LIFO reserve.
Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.
Cumulative retained earnings would be higher by (1 − 0.40)($900,000) = $540,000.
So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000 / $3,040,000 = 4.06.