FIFO and LIFO question

Dreary Wrote: ------------------------------------------------------- > Sure, but the question was is such a thing > possible, and the answer is most definietly yes. > Nonetheless, this is not necessarily abnormal. It > all depends on the line of business the company is > in, and the kind of inventory strategy it has. As > you know, many of the CFAI questions are not > necessarily about the average/normal way of doing > business. > > Dreary Having passed all 3 levels I am very familiar with CFAI’s way of asking questions. Even looking at your example the answer is still no, it is not possible. You don’t calculate CGS on a daily basis, or from hour to hour, or any other wierd period (at least not for CFAI purposes). In your example, CGS for the WEEK is exactly the same between the two methods. You have to assume that there is a reasonble reporting period being used.

Is it fair to say this thread’s basically split between a discussion of the hypothetical (Dreary’s example) and the practical considerations that prevent the hypothetical from ever actually occurring (Super’s observations)? I agree though that Super’s comments are more consistent with how candidates should understand this material in preparation for the exams.

Guy’s, I tried to follow this chian to the best I could, but now, I am so confused already that I don’t remember the full forms of FIFO and LIFO (haha… kidding) So it would be great if someone could re-iterate the crux of the conversation after the null-hypothesis (the claim) is rejected? - Dinesh S

As JVD, would say, nope. Dreary

nevermind Dreary, I’ll figure it out myself. - Dinesh S

Dinesh, the “nope” was about Super I claim that inventrory strategies all look the same, and cannot result in FIFO COGS being greater than LIFO COGS. So, obviously Super I does not believe inventory liquidation is possible. But to your question, the whol idea here is that FIFO COGS can be higher or lower than LIFO COGS depending on the situation. And as pointed out somewhere else, if LIFO COGS lead to overstated income due to declining prices, no need for adjustment by the analyst. An adjustment to NI should be made if LIFO leads to higher income because of inventory liquidation (as in the example I showed a couple of posts up). Dreary

Dreary In the books usually Inventory Liquidation is talked about along with 1. Falling Prices 2. LIFO So I believe this should be the only scenario we probably ought to keep in mind, given the closeness of the exam. Maybe Inventory liquidation, with FIFO, with rising prices does occur, but an analyst is supposed to make adjustments only in the case of LIFO Liquidation. Hope this puts this topic to RIP! CP

Thanks so much, Dreary. It’s crystal clear now. - Dinesh S