I’m having difficulty understanding why the 3 different methods (lifo, fifo, avg.) are explained and how they affect different fin’l statements, etc. while explaining that according to GAAP firms need to use LCM. Can someone explain why they would explain the affects on fin’l statements with the 3 methods if in fact at the end of the period you’re required to use LCM. I’m missing something… Thx in advance.
LCM means “lower of cost and market value” - but how do you calculate the cost bit, when you have multiple purchases with different costs? That’s where LIFO/FIFO/avg cost come in. Remember: EI = BI + P - COGS. Therefore the cost of the inventory is dependent on the method used to calculate COGS - ie it is dependent on whether LIFO/FIFO etc it used. Therefore there could be a situation where using LIFO (for example), the cost of the inventory could be less than the realisable value, but using FIFO it is higher. (or vice versa depending on if costs are rising or falling). Therefore in this case (where costs are falling), under LIFO you’d have to use the realisable market value according to LCM, but under FIFO, you wouldn’t.