CFA Level I · CFA Level I Exam · Analysis of Inventories
Under US GAAP, a company reports shareholders' equity of $1,000 million using LIFO, a LIFO reserve of $120 million, and a tax rate of 25%. Shareholders' equity restated to a FIFO basis is closest to:
Restated equity is $1,090 million. The LIFO reserve of $120 million is added to equity net of tax at 25%, which is $90 million, because the extra inventory carries a $30 million deferred tax liability. Adding the full reserve ignores that tax effect.
- A$1,030 million.
- B$1,090 million.Correct
- C$1,120 million.
Explanation
Moving to FIFO raises inventory by $120 million, but the higher income creates a deferred tax liability of 120 × 25% = $30 million. Equity rises by 120 − 30 = $90 million, giving $1,090 million. Adding the full reserve ignores tax, and adding only the tax amount of $30 million gives $1,030 million.
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