LIFO Reserve Example PDF

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ReTwo Year LIFO-FIFO Example (part 2 – continued from Cost Flow Example) For each year, calculate (1) the LIFO reserve, (2) the effect on before-tax income by using LIFO instead of FIFO, (3) the amount of taxes that would be deferred in that year by using LIFO, and (4) the amount of taxes that would have been deferred to date by using LIFO. Assume a 30% tax rate. Year 1 EI @ FIFO = $33,000 EI @ LIFO = -$22,000 LIFO reserve = $11,000

Year 2 EI @ FIFO = $42,000 EI @ LIFO = -$22,000 LIFO reserve = $20,000

LIFO Income down by $11,000 (COGS up by $11,000)

LIFO Income down by $9,000 (COGS up by $9,000)

COGS 11,000 LIFO Reserve 11,000

COGS 9,000 LIFO Reserve 9,000

Taxes deferred – current year

LIFO Reserve $11,000 Tax Rate x 30% Deferred tax $ 3,300

LIFO Reserve $ 9,000 Tax Rate x 30% Deferred tax $ 2,700

Taxes deferred – cumulative

LIFO Reserve $11,000 Tax Rate x 30% Deferred tax $ 3,300

LIFO Reserve $20,000 Tax Rate x 30% Deferred tax $ 6,000

LIFO Reserve

Effect on before tax income – current year

Note CY1 ($3,300) + CY2 ($2,700) = $6,000 (cumulative deferred YR2)

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CFR Company Gross Profit Computed Under FIFO and LIFO

Net sales Cost of goods sold Beginning inventory Plus: purchases Cost of goods available for sale Less: ending inventory Cost of goods sold Gross profit

FIFO $ 15,000 $ 2,000 10,000 12,000 (4,000)

LIFO $ 15,000 $ 1,000 10,000 11,000 (2,500)

$

(8,000) 7,000

Relationships: LIFO Reserve = FIFO inventory - LIFO inventory Beginning LIFO reserve = $2,000 - 1,000 = $ Ending LIFO reserve = $4,000 - 2,500 = $

1,000 1,500

(8,500) $ 6,500

LIFO Effect = Change in LIFO reserves from one period to the next LIFO effect = $1,500 - 1,000 or a $ 500 increase LIFO CGS FIFO CGS + (Ending LIFO Reserve - Beginning LIFO Reserve) = LIFO CGS $8,000 + (1,500 - 1,000) = $ 8,500 FIFO CGS LIFO CGS - (Ending LIFO Reserve - Beginning LIFO Reserve) = FIFO CGS $8,500 - (1,500 -1,000) = $ 8,000

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