I understand the conversion process (Lifo to Fifo), but would deeply appreciate some clarification regarding Lifo Cogs to Fifo Cogs.
Fifo Cogs = Lifo Cogs - (End Lifo reserve - Bgn Lifo reserve)
However, if there is no change in the LIFO reserve during the year, this implies that LIFO COGS and FIFO COGS were equal for the period…Can someone explain how this can be?? Does this mean that prices remained stable for the period, thus cogs were equal under both methods ? And the Inventory imbalance just carried over from a prior period
I guess what confuses me is that if there is a lifo reserve (thus LIFO End Inv does not equal FIFO End Inv), doesn’t that mean that the inventory balances include different prices, so why do those difference prices not flow into COGS, how can LIFO COGS equal FIFO COGS when LIFO and FIFO inventory aren’t equal.
FIFO CGS = LIFO CGS - change in the reserve
LIFO CGS is higher than FIFO CGS since it reflects the most recent purchases. To lower it, you take the change in the LIFO reserve
I get that. But if the change in the reserve = 0, then that implies that FIFO COGS = LIFO COGS. How can there be a lifo reserve yet lifo cogs equals fifo cogs for the period?
The lifo reserve indicates different ending inventory balances, so why wouldn’t those differences flow through to COGS?
you are right, if reserve change is 0, than, FOR THIS PERIOD only, LIFO cogs = FIFO cogs.
the lifo reserve is cumulative from a balance sheet perspective, so differences in inventory balances from cost flow assumptions over time builds up your lifo reserve, which is can be defined as: difference in inventory ending balance due to cost flow assumptions since the firms inception.
if there is no change in the reserve that means the change in ending inventory balance is the same this period whether you report using FIFO or LIFO, but there is still some cumulative differences that have built up since the firms inception that is reflected on your balance sheet.
How is it possible to have a chg in lifo reserve as 0 in an normally situation??(Inflationary environment)…I guess it would only happen in a stable situation??
Carthurj, but how would those presistent differences in ending inventory not flow through to COGS ?
A 0 change in lifo reserve must mean prices were stable for the period, but wouldn’t the prior period differences flow through still causing the cogs to be different? The first ones in might be from a prior period that are different than current prices, no?
Just not seeing how a lifo reserve can exist yet cogs be equal.
can you reference which question this is from?
no particular question. Just was reviewing the reading regarding inventories when this got me thinking (Rd 20). Just don’t understand how there can be a lifo reserve and cogs can be equal under both methods.
A LIFO reserve suggests that the ending inventory balances must include at least some differently priced units, so why would that not continue to flow through COGS - why would COGS be equal?
A better theory may be that it is impossible to have the situation you are trying to describe unless prices are completely stable for ending, purchases, and beginning inventory numbers. By default, there must have been price differences at some point in the past to amass a LIFO reserve. So, at the beginning of the period you have some inventory that is valued at X using Lifo and Y using FIFO - through buying and selling inventory in the coming period the reserve will be changing. Prices being stable in the current period wouldn’t really matter, because with FIFO you would be selling the old inventory on the books and with FIFO you would be selling the goods you purchased/“newer” beginning inventory. The number of units sold would be the same regardless of accounting treatment,
I think you would be hard pressed (if not impossible) to come up with the situation you are describing with changing prices - time that could be better spent studying something else
LIFO Reserve is a accumulated account - so it shows the nature of what the difference between the LIFO and FIFO COGS has been thro all time.