LIFO reserve illustration question, opposite, reporting, direction, understand

sweetgirl

This is a question re: example 6 in reading 36, page 399 in volume 3 financial reporting.

solution to Q2, why does the change in LIFO reserved equates the change in COGS in the opposite direction, i understand when prices go up FIFO would reduce COGS, how do you calculate the exact value from change in LIFO reserve?


Q4, if FIFO was used instead of LIFＯ, what would be the accumulative gross profit would be?

the solution is the gross profit would be the LIFO reserve minus the tax rate, this doesnt really make sense as LIFO reserve adds on the the vaue of inventory on the balance sheet, how does this translate to gross profit in the income statement?

cheers guys.

Beatnik

2) FIFO COGS = LIFO COGS - (end LIFO reserve - beginning LIFO reserve) so:
FIFO COGS = $29,549 - ($2,403-$2,345) = $29,491

3) COGS = beginning inventory + purchases - ending inventory
An increase in inventory is already included in the calculation of COGS, so you don't need to include it twice (would be my guess, as I'm not exactly an accounting professional)

4) additional income tax expense = LIFO Reserve X income tax rate [You put minus, but probably just a typo]

With rising prices, LIFO COGS > FIFO COGS
If COGS is higher, that means that your reported revenue is LOWER, so you are taxed LESS (even though you made the same amount of money)

Rev - COGS - other stuff = gross profit
higher gross profit = higher taxes

siavosh

and in question 3, why is the change in net income only equates the change in COGS? instead of COGS+ increase in inventory?