Reading 15 - inventory

CFA Level II
#1

Can anyone explain the intuition behind adjusting for CoGS? I don’t understand how the formula works.

CoGS(y) – (LIFO reserve(y) – LIFO reserve(y–1))

y is the year.

#2

That looks like the COGS(FIFO).

So the COGS under the FIFO method is the COGS reported under the LIFO method, minus the amount that was added to the LIFO reserve.

The amount subtracted from COGS(LIFO) is the amount of the LIFO reserve today, minus the amount of the LIFO reserve from the previous period.

#3

The LIFO reserve is cumulative since time immemorial. Each year it changes by the difference between LIFO COGS and FIFO COGS. Thus, to adjust COGS (from LIFO to FIFO), you subtract the change in the LIFO reserve.