To convert COGS from FIFO to LIFO, we are given the following formula (Ending LIFO Reserve - Beginnign LIFO Reserve)/ Beginning FIFO Inventory If we’re essentially measuring growth in the LIFO reserve, why do we devide the base by beginning inventory??
I learned this as COGS_lifo = COGS_fifo + (Beg. Inv. fifo x r) where r = the specific inflation rate appropriate for the firm’s inventory products. r can be seen as (change in LIFO reserve) / Beg. Inv. fifo just as you have stated above. You only have half of the formula needed here. Therefore, when you multiply what you have above by Beg. Inv. fifo as in what I said at the beginning, it will cancel with the Beg. Inv. fifo in your equation, and you will be left with COGS_lifo = COGS_fifo + change in LIFO reserve. Make sense?
That is the rate of inflation, so to speak. to be used in order to get the comparable FIFO COGS when you are comparing companies with a LIFO valuation methodology with a FIFO valuation methodology. To convert COGS Lifo to COGS FIFO --> COGS FIFO = COGS LIFO - (Change in LIFO Reserve).