Declining prices and Declining LIFO Reserve

CFA Level II
#1

There are 2 reasons we might see a decline in LIFO reserve 1. Lifo liquidation. 2. Declining prices.

Could someone chime in on why a firm will see decline in its LIFO reserve when prices of firms product fall over a period?

Thanks

#2

When prices are declining, LIFO liquidation can occur because management thinks it’s better to wait before buying inventory again, in order to buy at the lowest possible price. I’m pretty sure I read this either in Schweser guides or the curriculum.

#3

I believe that the second reason should be _declining costs _, not declining prices.

It has nothing to do with the price of the stuff we sell; it has to do with the cost of our inventory: when inventory costs are falling, under LIFO we’re charging lower costs to COGS and keeping higher costs in ending inventory, whereas under FIFO we’re charging higher costs to COGS and keeping lower costs in ending inventory. If the price of our product falls when costs fall, that’s incidental to the value of the LIFO reserve.

This has nothing to do with LIFO liquidation.

#4

Schweser clearly states prices, not costs but does not explain this concept…

#5

Yea, notes don’t really explain the concept behind this. I’m still a bit confused by it.

This somewhat coincides with reading 17 cfa eoc #17. For a company using LIFO, why would it see a decrease in inventory levels because of decreased sales volume, when LIFO reserve increased (implying no LIFO liquidation).

Can someone explain this please? I thout inventory levels should rise with decreased sales

#6

And I think that that’s just sloppy language on their part; COGS and inventory reflect costs (of buying inventory), not prices (of selling inventory). (Yes, I know the lower-of-cost-or-market thing; that’s not what they’re discussing here.)

#7

As I don’t have the curriculum I cannot comment on that specific question. However, inventory level won’t necessarily rise with decreased sales; it also depends on purchases.