last question before exam 300, question, balance, before

domani

Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):
Cash $1,100,000 Accounts Payable $400,000
Accounts Receivable 300,000 Deferred Tax Liability 700,000
Inventory 2,400,000 Longterm Debt 8,200,000
Property, Plant & Eq. 8,000,000 Common Stock 1,000,000
Total Assets 11,800,000 Retained Earnings 1,500,000
LIFO Reserve at Jan. 1 600,000 Total Liabilities & Equity 11,800,000
LIFO Reserve at Dec. 31
900,000
Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40 percent. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assetstoequity ratio would be closest to:
A) 4.06
B) 3.63
C) 3.73
D) 4.18
Your answer: D 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 assetstoequity ratio would be $12,340,000/$3,040,000 = 4.06.
For calculating the difference in profit here ending lifo reserve has been considered. dont we consider the change the lifo reserve? am i missing something here??

Sunshine4ever

Balance sheet is based on end of period… you only use change in LIFO reserve when calculating the changes to COGS for the period… not at a specific period of time