Hi Guys, as many time I try to understand the logic behind LIFO & FIFO I get myself more confused. Here is the one that I tripped over. Also can you please suggest some links/materials for LIFO and FIFO to understand inventory terminology and understand the concepts from basics? Thanks. First in, first out (FIFO) inventory equals: A) LIFO inventory + LIFO reserve. B) the change in LIFO reserve - LIFO ending reserve. C) LIFO cost of goods sold - changes in LIFO reserve. D) LIFO profit + (change in LIFO reserve)(1 - t).
A, to adjust the balance sheet to show a more accurate picture of inventory, you add the LIFO reserve to the current LIFO inventory balance. You do this because LIFO inventory has old inventory on the balance sheet and the prices are likely outdated. You want to adjust that to show the FIFO inventory which shows the most recent inventory balance.
Don’t forget that the LIFO reserve is cumulative.
answer is A. here an extract from http://blog.accountingcoach.com/lifo-reserve/ Let’s assume that a company’s accounting system uses FIFO (first-in, first-out), but the company wants its financial and income tax reporting to use a LIFO (last-in, first-out) cost flow assumption due to persisent inflation of its costs. The LIFO reserve is a contra inventory account that will reflect the difference between the FIFO cost and LIFO cost of its inventory. With consistently increasing costs, the balance in the LIFO reserve account will have a credit balance—resulting in less costs reported in inventory. Recall that under LIFO the latest (higher) costs are expensed to the cost of goods sold, while the older (lower) costs remain in inventory. The credit balance in the LIFO reserve reports the difference in the inventory costs under LIFO versus FIFO since the time that LIFO was adopted. The change in the balance during the current year represents the current year’s inflation in costs. The change in the balance in the LIFO reserve will also increase the current year’s cost of goods sold. That in turn reduces the company’s profits and taxable income. The change in the balance of the LIFO reserve during the current year multiplied by the income tax rate reveals the difference in the income tax for the year. (The balance in the LIFO reserve times the income tax rate reveals the difference in income tax since LIFO was adopted.) The disclosure of the LIFO reserve allows you to better compare the profits and ratios of a company using LIFO with the profits and ratios of a company using FIFO. Since the accounting profession has discouraged the use of the word ”reserve” in financial reporting, the inventory notes in annual reports have descriptions such as Revaluation to LIFO, Excess of FIFO over LIFO cost, and LIFO allowance instead of LIFO reserve.
moto376 that is perfect explanation, I can understand the logic behind. Can you suggest some reading material for this. Thanks a ton.
barthezz, great explanation. The info about other names for the LIFO Reserve is especially helpful.
I’m not really sure about other reading material. Are you studying out of the CFAI texts? That’s what I used, and it seems like they did a good job explaining.
OK I think its time for me to refresh… thanks.