Hey, guys. Had a quick question about FIFO/LIFO questions. I understand the FIFO and LIFO concepts–I pretty much always get the right answers on questions. However, I seem to have dyslexia when it comes to this topic, and it generally takes me multiple times longer to answer these questions than it should as I try to lay out the process on paper. Obviously, time is of the essence and spending 3 or 4 times longer on a question takes away good energy for other questions.
I was curious if any of you guys had some quick and easy “formulas” or ways of attacking FIFO/LIFO. What do you guys do to quickly and easily lay out the concept or to attack these types of questions? Frankly, part of me thinks that while I get the concept I don’t really “get it” deeply, otherwise it would be easy. Do you think I just need to practice a bunch of questions or are there good principles to keep in mind or methods of laying out the information?
I know this is kind of an open-ended question, but I appreciate any insight.
Sitting for L2 in 2015 so I’m not really your competition.
I generally encourage my candidates to concentrate on one scenario and understand it completely: FIFO under rising costs. (As rising costs is the normal situation, it makes sense to spend time understanding it.)
When costs are rising, FIFO inventory will be higher than LIFO inventory (new costs in inventory under FIFO, old costs under LIFO) and FIFO COGS will be lower than LIFO COGS (old costs in COGS under FIFO, new costs under LIFO). Thus, under FIFO:
Inventory is lower higher (than under LIFO)
COGS is higher lower
EBT is lower higher
Taxes are lower higher
Net income is lower higher
Retained earnings is lower higher
Equity is lower higher
Assets are lower higher
Cash is higher lower (because taxes are lower higher)
Current ratio is higher
Quick ratio is lower
Debt-to-equity is higher lower
ROE is lower higher (the percentage change in net income is higher than the percentage change in equity, because equity includes cumulative earnings for a number of years)
and so on
If you’ve memorized (or can work out) the effects using FIFO when costs are rising, then the rest are easy: when costs are falling, everything is reversed, and LIFO under rising costs is the same as FIFO under falling costs.
Ending inventory is higher, but cash is lower. The net, however, is higher (cash is lower because of higher taxes, but the tax rate is less than 100%).