honeycfa

An analyst gathers the following information about a firm:

• Last in, first out (LIFO) inventory = $10,000
• Beginning LIFO reserve = $2,500
• Ending LIFO reserve = $4,000
• LIFO cost of goods sold = $15,000
• LIFO net income = $1,500
• Tax rate is 40%

To convert the financial statements to a FIFO basis, the amount the analyst should add to the stockholders' equity is closest to:

A) $2,800.

B) $4,000.

C) $2,400.

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If the firm had used FIFO inventory cost, tax liability would be higher by (LIFO reserve × tax rate) and retained earnings would be higher by [LIFO reserve × (1 ? tax rate)].

(LIFO reserve)(1 ? t) = $4,000(1 ? 0.4) = $2,400

honeycfa

Wallace Lumber uses LIFO and had the following note in its last financial statement: "Wallace Lumber showed a LIFO reserve of $90,000 in 2003 and $86,000 in 2004." Wallace's marginal tax rate is 31%.

If Wallace's year-end LIFO inventory balance was $400,000, their inventory based on FIFO would be:

A) $486,000.

B) $490,000.

C) $314,000.

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INV_F = INV_L + LIFO reserve

        =$400,000 + $86,000

        = $486,000

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If Wallace's LIFO COGS were $70,000, their FIFO COGS would be:

A) $66,000.

B) $64,000.

C) $74,000.

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COGS_F = COGS_L - (LIFO reserve_E - LIFO reserve_B)

            = $70,000 - ($86,000 - $90,000)

            = $74,000