Two basic questions I’m hoping I can get help with…unrelated to each other 1. What is the formula to convert LIFO net income to FIFO net income? Do you add (change in LIFO reserve * (1 - t)) to LIFO net income? Or do you simply add (LIFO reserve * (1 - t))? Or is it something else all together? 2. Can someone give me basic help on how to determine the appropriate critical values to select in a t-test for example? I often find myself struggling to determine whether to divide the significance level by two or not. The degrees of freedom obviously comes easy but I have trouble with the sig level. I know this is a little vague, but any help would be greatly appreciated.
- i think the only component affecting the I.S. is COGS, which is an expense. COGS FIFO adjustment is: COGS_L - Change_LIFO_reserve So, if lifo reserve is increasing (as would be expected), you’re COGS decreases by CH_LIFO_res, which would mean your net income increases by (1-t)*(CH_LIFO_res). 2. If it is two-tailed, you take alpha/2 when looking up the critical value. Whenever the null hypothesis is something = something, like b = 0, this results in two tails since it is invalid in either direction. I think all tests but the F-test for this curriculum use two-tails since you are testing significance. IF a value = 0, it’s insignificant, so we want to make sure we’re far enough from 0 to be significant. help?
Net Income adjustment is first one add (change in LIFO reserve * (1 - t)) to LIFO Income Equity adjustment is second one add (LIFO reserve * (1 - t)) to LIFO Equity Inventory and cash adjustments: add LIFO reserve to LIFO Inventory subtract (LIFO reserve)*t from cash As a result Asset Adjustments = Equity Adjustment All significance tests are two-tailed tests with exception of F-test, which is always one-tailed
You subtract the change in the LIFO reserve *(1-t) to = FIFO net income. This is important to remember! When prices are rising, FIFO NI > LIFO NI.
grumble Wrote: ------------------------------------------------------- > You subtract the change in the LIFO reserve *(1-t) > to = FIFO net income. This is important to > remember! When prices are rising, FIFO NI > LIFO > NI. Are you sure? If prices are rising and inventory stable or rising LIFO reserve will rise as well. If you subtract (change in the LIFO reserve *(1-t)) from LIFO income you will get FIFO NI < LIFO NI not as you stated.
grumble, read the first half of what you wrote again compared to your last equation ( which is correct) i always go back to components and why or i can get confused.
BTW, as new material this topic has a good chance to be on the exam.
To the OP - on the t-test front just remember: - if it’s an equal sign then use two tails - if it’s greater than or equal to / less than or equal to then use a 1 tailed test
So if the question tells us it’s a two-tailed test and asks us whether or not we can reject the null at 5% significance level, do I find the critical t using .05 or .025?
use two-tailed part under .05 or one-tailed part under .025