Inventories - LIFO liquidation actually increases LIFO reserves (examples)
Hey guys, I am struggling a bit with how LIFO liquidation causes LIFO reserve to DECREASE. (as per answer to practice question 7 in Inventory section). I can show two example where LIFO reserve increases due to LIFO liquidation (selling more than buying/producing)
Consider the following example:
Two companies start with inventories containing 2 units of cost $1 per unit and 2 units of cost $2 per unit (both have inv of $6). I will write this as 1,1,2,2.
Then they both sell a unit:
Inventories become 1,1,2 for LIFO and 1,2,2 for FIFO (LIFO reserve = 1)
They both buy a unit for $3:
Inventories are 1,1,2,3 for LIFO and 1,2,2,3 for FIFO
They both sell two units:
Inventories are 1,1 for LIFO and 2,3 for FIFO (LIFO reserve = 3)
The LIFO reserve has clearly increased under LIFO liquidation (it went from 1 to 3). I have triple checked my maths and im pretty sure im not making any errors. Is the rule only defined for certain values or something?
Another example - two companies have inventories with three units of a good with costs 3,3,3 and 4,4,4 (Lifo and Fifo respectively) [LIFO reserve = 12 - 9 = 3]
They both buy one unit for 10:
3,3,3,10 and 4,4,4,10
They both sell 2 units, and are left with:
3,3 LIFO inv, 4,10 FIFO inv. [LIFO reserve = 14 - 6 = 8]
The LIFO reserve increases again, this time from 3 to 8. Am I doing something wrong?
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