This question says that Gross profit margin decreases because the adjustment is made from LIFO to FIFO for cost of goods sold. But in the footnotes, it says “assume that inventory has been to a FIFO basis, where appropriate”. Why would it be appropriate to change cost of goods sold to FIFO? why not leave it in LIFO? I dont understand this adjustment at all. Can anyone explain this? In general, is it ok to adjust inventory to FIFO and Cost of goods sold to LIFO in the same financial statements, or does it have to be the same, and one will be under/overstating something. Thanks for the help Thanks.
If I remember right, FIFO COGS is more conservative. LIFO COGS on the Income statement and FIFO Ending Inventory on the Balance sheet is a measure of more current costs. FIFO COGS would be the more conservative figure (with either rising or falling prices). This is why it is preferred. CP
If costs were rising, wouldnt FIFO make COGS lower? That would not be conservative. You would be overstating earnings.
agreed, gusto. if prices are rising, lifo cogs would be more conservative. i can’t find why we would adjust it this way either since the the question does not say it is a deflationary environment… was this question just worded poorly? anyone have feedback or is this an error?
I am sorry. Said the wrong thing above. Need to go back and check the books… Will post after that. Sorry again. CP
gusto, I believe the text is asking to change Inventory to a FIFO basis - Inventory is on the Balance Sheet and FIFO on the Balance sheet is more representative of current costs. I think you are confusing FIFO on Balance sheet for Inventory with COGS on the Incomet statement (which must be LIFO COGS – for more current costs).