pogo

how are you calculating it with COGS
The difference of $500 only accounts for the current year addition to the LIFO reserve but not accounting for the $2000 already in there



Edited 1 time(s). Last edit at Tuesday, September 29, 2009 at 10:00AM by cfagoal2.

dontknow1987

Sorry, missed out something. Below is my whole working.

LIFO COGS = $15000
FIFO COGS = $15000 - (2500 - 500) = $14500

LIFO CS = $6500
FIFO CS = $6500 + $2500 = $9000

Pre-tax income will be higher by $500 + $2500 = $3000. Therefore, increased in RE = $3000 * 0.6 = $1800.

Why is COGS left out in the calculation?

Thanks.

dece2011

COGS is used in the calculation, net income is higher because COGS is reduced by $2500 when converted to FIFO method. The $500 difference is only for the current period, the question is asking for a total conversion.



Edited 2 time(s). Last edit at Tuesday, September 29, 2009 at 01:31PM by cfagoal2.

kamara5

I think I am missing out some concept about conversion to FIFO COGS here.

Shouldn't we compare current year LIFO's COGS ($14,500) to FIFO's COGS ($15,000) and work out the difference it made to current year's RE?

dotamasta

revenant Wrote:
-------------------------------------------------------
> I think I am missing out some concept about
> conversion to FIFO COGS here.
>
> Shouldn't we compare current year LIFO's COGS
> ($14,500) to FIFO's COGS ($15,000) and work out
> the difference it made to current year's RE?

Yes, usually you use only current year's figures. But not in this case. This is because, you cannot have your RE based on FIFO this year and based on LIFO for last year.

Also remember, Retained Earnings is a cumulative figure and not a yearly figure.

Hope this clarifies.