LIFO Reserve + COGS


Here’s the question -

Aof 20X14 Dec 31

Current Assets $5

Current Liabiilties $10

20X13 LIFO Reserve $10

20X14 LIFO Reserve $12

What would COGS, if we use FIFO, be at the end of 2014?

While converting COGS to FIFO type, why do we have to subtract the change in LIFO Reserve (i.e. 12-10) versus (12). I know that we need to subtract LIFO Reserve. Hence, I am good with the concept of subtracting. However, I am not sure why we need to subtract the change instead of the point value 12.

What would Assets, if we use FIFO, be at the end of 2014?

On the other hand, if I have to compute total assets, I would add the point value $12 and not the change i.e. 12-10 = 2. As before, I know the reason why we need to add LIFO Reserve – no issues with this. However, I don’t know why we are adding the point value and not the delta or change.

Please help.

Thanks in advance.

The underlying idea behind converting from LIFO to FIFO (or vice-versa, which, fortunately, CFA Institute doesn’t require you to learn to do), is that you want the adjusted financial statements to appear as though you were using FIFO all along, not just this year.

Also, realize that the LIFO reserve represents the cumulative difference between LIFO inventory and FIFO inventory since time immemorial. Each year, the change in the LIFO reserve is this year’s LIFO vs. FIFO difference; it’s added to last year’s LIFO reserve (cumulative through last year) to get this year’s LIFO reserve (cumulative through this year).

So, the adjustment to this year’s income statement is the change in the LIFO reserve; the change in this year’s balance sheet is the cumulative change: the total LIFO reserve.

Mind sharing where you get this question? I did not see this in Schweser Notes

It’s somewhere in the last 3 readings of the FRA. If I remember correctly, this is in the 2nd last reading of FRA.

Btw this is more of L2 Topic but it can be tested on L1 as well.