Hello, I am confused on one part of LIFO vs. FIFO and was hoping for a little help! Part of my question has been addressed in a different thread, but it was focused on a different part of the problem so didn’t really shed any light on the situation. When converting from LIFO to FIFO, I understand clearly that the FIFO inventory is the LIFO inventory plus the LIFO reserve. That makes perfect sense. However, when converting LIFO C.O.G.S. to FIFO C.O.G.S., you simply add the difference between LIFO reserve from the current and previous year. I can’t seem to wrap my head around that. Any help would be greatly appreciated!
End Inventory = Beg Inventory + Purchases - COGS. Notation: EI = BI + P - COGS, LIFO reserve = LF COGS(LIFO) = BI(LIFO) + P - EI(LIFO) COGS(FIFO) = BI(FIFO) + P - EI(FIF0) = BI(LIFO) (equation 2) But BI(FIFO) = BI(LIFO) + LF(Beginning) and EI(FIFO) = EI(LIFO) + LF(Ending) Now substitute these into equation 2 and simply/cancel out to get the formula.
Cool… coming from an engineering background I understand the definitions from first principals much better 
Thanks! I was also hoping for there to be a “wordy” explanation to why that is true. Is there a way to explaining it without deriving the equation?
Heh. I’m the same way. But I think it’s necessary to memorize certain things for the purpose of this exam. The intuitive explanation is that COGS and inventory balance have an inverse relation. In increase in LIFO reserve means rising prices, so FIFO inventory is adjusted by more. For the same reason, the increase in LIFO reserve is subtracted from COGS.
The second period LIFO reserve include the first period LIFO reserve, therefore only when the difference between LIFO in each period deducted from the LIFO COGS can the FIFO COGS being calculated. For LIFO to FIFO inventory, only the difference in that period matters.