Right, in my notes I have written inventory should always be adjusted to FIFO as it is the best approximation of current value and COGS should be adjusted to LIFO. However in practice exam 2 PM the answers say: “LIFO as an inventory cost flow assumption during periods of stable or rising prices would cause net earnings to reflect economic (real) earnings, thereby leading to higher earnings quality” So if you get a question saying which inventory recognition method results in higher quality revenue recognition FIFO or LIFO, which is it? Thanks
Lvl I says FIFO is best for COGS. Lvl II says LIFO is better for currency related re-measurement. Lvl I never talked about currency . Lvl II FIFI/LIFO is only about currency
Is that so? I remember this: Level I: (Please reconfirm, Janakasri). ============================================= LIFO COGS is better - because your current costs are in COGS… FIFO End Inv is better - your latest Inventory is present in Ending Inventory. So that is the better representation of your ending inventory.
That’s what I’ve learnt so why is the answer contradictary?
CP , you are right. I referred my notes on L1 and FIFO is better for Inventory , LIFO for COGS. sorry for the confusion
mambovipi Wrote: ------------------------------------------------------- > That’s what I’ve learnt so why is the answer > contradictary? The answer is not contradictory. "I have written inventory should always be adjusted to FIFO " Ending inventory is on the balance sheet not the income statement “COGS should be adjusted to LIFO” COGS is an income statement item. You adjust it to LIFO to get a better quality income statement “LIFO as an inventory cost flow assumption …blah…blah…blah… thereby leading to higher earnings quality” Here we have LIFO mentioned again in the context of earnings quality (earnings is the income statement, not the balance sheet. There is no contradiction. One other thing to point out. In your question at the end you use the phrase “higher quality revenue recognition” the LIFO FIFO issue has no effect on REVENUE, it affects CGS, gross margin and net earnings.
Stupid questions. Thanks for pointing out the obvious, I look at it now and it seems obvious. Thanks anyway