nitoha

When there is an increase in prices and a consequent increase in LIFO reserve over the period to convert from LIFO to FIFO an analyst must:

Add the LIFO Reserve to inventory (current assets)

Add (LIFO Reserve * tax rate) to deferred tax liabilities (curent liabilities)

Add [LIFO Reserve * (1 - tax rate)] to retained earnings (shareholders' equity)

If there is a decrease in prices, simply do the opposite (i.e. instead of adding, just subtract the above-calculated amounts)

The DTL adjustment might require more explanation. In a period of rising prices, by only subtracting LIFO COGS instead of FIFO COGS from sales, a company is able to recognize lower gross profits. Lower taxable income leads to lower taxes being paid out in the current period. Therefore, in a period of rising prices, a LIFO delays paylment of a certain portion of taxes to a later period. Hence, the increase in DTL when converting to FIFO.

Just remember the three adjustments and you'll be fine.