Assignment:
Part of the inventory footnote, taken from Harsco Corp.'s 2006 financial statements, is available below:
Other information: Inventories valued on the LIFO basis at December 31, 2006 and 2005 were approximately $36.5 million and $41.8 million, respectively, less than the amounts of such inventories valued at current costs. As a result of reducing certain inventory quantities valued on the LIFO basis, net income (after tax) increased by $3.2 million, $1.5 million, and $1.2 million in 2006, 2005, and 2004, respectively.
Required to do:
Q1. By how much would net income after taxes have differed for 2006 if Harsco had used FIFO method for valuation of inventory items, rather than LIFO method? Assume a 30% marginal tax rate. Be sure to indicate whether FIFO income would be higher or lower than LIFO income. (Hint: By definition, difference between LIFO inventory and current cost inventory values is LIFO reserve)
Q2. What would the LIFO reserve have been on December 31, 2006 if no LIFO liquidation had occurred in 2006? (Hint: without LIFO liquidation, LIFO reserve does not reflect the pretax profit from the liquidation of LIFO layer)