As indicated in the chapter, the FIFO and LIFO inventory methods can result in significantly different income statement and balance sheet figures. However, it is possible to convert income for a LIFO firm to its FIFO-based equivalent. To assist financial statement users in this task, companies using LIFO are required to disclose in their footnotes the “LIFO reserve” (LR). That is, they must disclose the difference between the inventory balance shown on the balance sheet and the amount that would have been reported had the firm used current cost (or FIFO), as illustrated for Brown Shoe Company on page 433.

The following equation converts LIFO cost of goods sold (COGS) to FIFO cost of goods sold.

COGS_FIFO = COGS_LIFO - LIFO effect

where

LIFO effect = [LR_ending - LRb_eginning]

The following equation converts LIFO net income (NI) to FIFO net income.

NI_FIFO = NI_LIFO + (LIFO effect) (1 - tax rate)

Instructions

Obtain the annual report of a firm that reports a LIFO reserve in its footnotes.

(a) Identify the LIFO reserve at the two most recent balance sheet dates.

(b) Determine the LIFO effect during the most recent year.

(c) By how much would cost of goods sold during the most recent year change if the firm used FIFO?

(d) By how much would net income during the most recent year change if the firm used FIFO?