Why does the CFA have an obsession with LIFO?

CFA Level I FRA
#1

I’m doing practice questions and mocks from both the CFAI materials and Schweser and I’m surprised by the huge obsession with LIFO inventory.

Not only is it a relatively marginal part of accounting (by which I mean there are much bigger things to test), but its also forbidden under IFRS.

Why does the CFAI like it so much then? I would understand perhaps one question every now and then but it just keeps coming up over and over it seems.

#2

Not to mention that GAAP will revert to IFRS soon.

It might be because the US capital market is the biggest in the world, and it will be some time before LIFO is phased out completely. So you need to know it well for the time being.

#3

You’re learning the basics of accounting at L1. You’ll see how to apply the knowledge at L2. At L2 you’ll need to know how to make the appropriate adjustments to compare LIFO and FIFO firms.

You’re right, GAAP is goin the way of the dodo but there are still firms that account for inventory under LIFO. I value companies, often using comps, and there are certain industries where LIFO is more prevalent. It’s useful (for now) to know how to adjust the statements and compare these companies.

#4

Also, LIFO requires more work than FIFO, so practicing LIFO is beneficial.

#5

It builds character.

#6

+1

if you know lifo, fifo is easy.

#7

Thanks for the replies.

I just think that the big emphasis on this topic is really odd because:

  1. How many firms actually have material amounts of inventory?

  2. Of those how many actually use LIFO?

  3. Of those for how many will the LIFO vs FIFO decision actually have a material impact on the financial statements?

The number of questions I’ve seen on them seems to make it seem like its the most important thing in the world but considering the entire spectrum of financial reporting, it really seems like a marginal sideshow to me compared to the bigger topics.

#8

I would agree with your point, as well as the others, that the LIFO discussion seems relatively insignifcant. While there are many trade-offs, I think the biggest benefit that companies find in using LIFO is lower taxable income because of higher COGS. Since this can be a signficant benefit, LIFO will maintain relevancy until it goes away. From there, we can only speculate as to why CFAI leans on it so heavily.