LIFO Inventory = better earnings quality?

Reading that in CFAi Vol2 p.315 I thought we adjusted to FIFO Inventory on the B/S – always – to better reflect economic reality… does this mean that economic reality is at odds with conservative reporting and in turn higher quality earnings?

FIFO is better for BS, but for IS LIFO represents better reality, as more recent items are expended.

FIFO / LIFO preference depends on what analysis you are doing. If you’re adjusting the balance sheet for a residual income analysis, you want to use FIFO. However, for I/S figure, LIFO is prefered.

LIFO better for Inventory, FIFO better for COGS.

BTON04 Wrote: ------------------------------------------------------- > LIFO better for Inventory, FIFO better for COGS. No, it’s the opposite. Remember, we’re trying to reflect economic reality.

so what do I do I’m so confused! Do you leave COGS and Inventory at LIFO if you’re analyzing an income statement and leave COGS and Inventory at FIFO if you’re analyzing a balance sheet? Do you use FIFO for inventory and LIFO for COGS?

Basically anything that makes net income LOWER = higher earnings quality :slight_smile: In a rising price environment, LIFO = higher COGS so Net Income is lower. When adjusting a balance sheet, you want to adjust everything to its truest, most real world value. So, for a BS you use FIFO. In a rising price environment this increases Inventory by the amount of the LIFO reserve.

cubemonkey, I agree with the BS part but that page I quoted in OP reads otherwise… still confused. but am over it… if not related to RI model, you want LIFO Inventory