have been getting some questions confused when they ask for differences in LIFO, FIFO inventory, COGS, and these should not be confusing. to confirm, companies can only use one method of accounting for COGS and inventory, correct? guess sometimes get mixed up when they say FIFO COGS vs LIFO inventory and think they are using different methods to account for each. thanks, john
Right, you can only use one method. Just remember the two formulas and you should have any COGS or Inv question nailed. FIFO COGS = LIFO COGS - Change in LIFO Reserve FIFO Inv = LIFO Inv + LIFO Reserve
I like to draw two little barrels. One with an arrow going into the top, then coming back out of the top (LIFO) and the second with an arrow coming into the bottom and going out the top (FIFO). Then I can see, if prices are rising (the pieces going into the barrel are getting bigger) how full the barrel is getting (Inv). And how big the pieces coming out (COGS) are. Because, in this normal situation of raising prices, the barrel gets fuller under FIFO, I know that FIFO would, normally be bigger than LIFO, so FIFO = LIFO Inv + LIFO Reserve. I have gotten blazingly quick at sorting this out.
couple more points - IFRS doesn’t allow LIFO under GAAP, companies must use the same method entirely (either LIFO or FIFO) for tax and financial statement purposes. - keep these in mind for LEAST likely/more likely type questions. LIFO my FIFO.