yet another Qbank question on inventory additional, question, another, balance, instead

dotamasta

here is the question
Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):
Total Assets 11,800,000
Inventory 2,400,000
Common Stock 1,000,000
Retained Earnings 1,500,000
LIFO Reserve at Jan. 1
600,000
LIFO Reserve at Dec. 31
900,000
Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. 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) 3.73
B) 4.18
C) 4.06
Your answer: A was incorrect. The correct answer was C) 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 (0.60)($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.

mdfb79

LIFO Reserve represents profits not recognized and taxes that were not paid (because the higher costs were disguised).
1.) Add the LIFO reserve to the Inventory Balance
2.) (1.4)(LIFO Reserve) = the profits made, but not recorded.
3.) (.4)(LIFO Reserve) = the tax liability
The numerator is as follow:
(Total Assets) + (LIFO Reserve)  (Tax Liability)
The denominator is as follows:
(Value of Common Stock) + (Retained Earnings) + (Aftertax LIFO Reserve Profits)
$1,000,000 + $1,500,000 + $540,00= 3,040,000
They definitely gave too much information  Jan 31 LIFO Reserve and Inventory  to throw off the calculation, which never helps
“The change in equity equals to the aftertax rate of change COGS” is right and the same as the change in retained earnings. LIFO disguises COGS as to be higher, which results in a lower retained earnings. So a change in pretax COGS be the same as pretax retained earnings…
hopefully that helps some
AM

whew1110

LIFO Reserve represents profits not recognized and taxes that were not paid (because the higher costs were disguised).
1.) Add the LIFO reserve to the Inventory Balance
2.) (1.4)(LIFO Reserve) = the profits made, but not recorded.
3.) (.4)(LIFO Reserve) = the tax liability
The numerator is as follow:
(Total Assets) + (LIFO Reserve)  (Tax Liability)
The denominator is as follows:
(Value of Common Stock) + (Retained Earnings) + (Aftertax LIFO Reserve Profits)
$1,000,000 + $1,500,000 + $540,00= 3,040,000
They definitely gave too much information  Jan 31 LIFO Reserve and Inventory  to throw off the calculation, which never helps
“The change in equity equals to the aftertax rate of change COGS” is right and the same as the change in retained earnings. LIFO disguises COGS as to be higher, which results in a lower retained earnings. So a change in pretax COGS be the same as pretax retained earnings…
hopefully that helps some

hw0799

Is this Lvl 1?

Nishant1

bump……

maratikus

the method given in the cirriculum is the change in equity equals to the aftertax rate of change in COGS. here, the answer seems to say that change in net income equals the LIFO reserve after tax. i am not sure which to use to calculate equity now. should I just remember as a fact now that LIFO reserve equals pretax income increase when converting LIFO to FIFO.
Am I reading the right Qbank?