LIFO

Examples of LIFO in the following topics:

• Adjusting for LIFO Reserve

  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • The SEC requires that all registered companies that use LIFO report their LIFO reserves for the start and end of the year.
  • Explain how the LIFO reserve is calculated and how to report it on the financial statements

• The LIFO Reserve

  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • In this instance, the LIFO reserve is a contra inventory account that will reflect the difference between the FIFO cost and LIFO cost of its inventory.
  • The credit balance in the LIFO reserve reports the difference in the inventory costs under LIFO versus FIFO since the time that LIFO was adopted.
  • The accounting profession has discouraged the use of the word reserve in financial reporting, so LIFO reserve may sometimes be called: Revaluation to LIFO, Excess of FIFO over LIFO cost, or LIFO allowance.

• Advantages of LIFO

  • LIFO is only used in Japan and the U.S.
  • LIFO is only used in Japan and the U.S.
  • LIFO: (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO: (+) Higher value on inventory (-) Lower cost on goods sold
  • Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.

• Disadvantages of LIFO

  • LIFO is facing pressures from international standards boards that may result in its possible complete elimination.
  • LIFO is facing pressures from both the International Reporting Standards Board in cooperation with the SEC and the U.S.
  • IFRS is balance sheet oriented and, on this basis, disallows LIFO as an inventory method.
  • The use of LIFO disrupts the theoretical foundation of the IFRS and if plans proceed as expected, complete phase-out of LIFO will occur in the near future.
  • More importantly is the current tax position on LIFO.

• LIFO Method

  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.
  • LIFO is only used in Japan and the United States.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the "LIFO reserve. " This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • Summarize how using the LIFO method affects a company's financial statements

• Dollar-Value LIFO

  • Dollar value LIFO (last-in, first-out) is calculated with all figures in dollar amounts, rather than inventory units.
  • This inventory method follows LIFO (last-in, first-out).
  • Dollar value LIFO uses this approach with all figures in dollar amounts, rather than inventory units.

• Flow of Inventory Costs

  • LIFO is only used in Japan and the United States.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • LIFO (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO (+) Higher value on inventory (-) Lower cost on goods sold
  • Discuss how a company uses LIFO or FIFO to calculate the cost of inventory

• Comparability

  • If a company uses LIFO, the recorded amount of inventory is not an accurate reflection of cost, reducing comparability to companies using FIFO.
  • The LIFO method results in lower ending (and beginning) inventory on a company's balance sheet because the oldest (and therefore usually less expensive due to inflation) items remain in the inventory.
  • Based off of this information, one can assume that if a company uses LIFO, the recorded amount of inventory is not an accurate reflection of cost of the current period.
  • This low valuation affects the computation and evaluation of current assets and any financial ratios that include inventory, resulting in reduced comparability between companies using LIFO and others using FIFO.

• Impact of Inventory Method on Financial Statement Analysis

  • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
  • The LIFO reserve (an asset or contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions.
  • Dollar Value LIFO is a variation of LIFO.
  • Any increases or decreases in the LIFO reserve are determined based on dollar values rather than quantities.
  • Under LIFO: Ending Inventory is lower, and total current assets are lower; cost of goods sold is higher, and gross profit is lower.

• Selecting an Inventory Method

  • Those who favor LIFO argue that its use leads to a better matching of costs and revenues than the other methods.
  • When a company uses LIFO, the income statement reports both sales revenue and cost of goods sold in current dollars.
  • When a company uses the weighted-average method and prices are rising, its cost of goods sold is less than that obtained under LIFO, but more than that obtained under FIFO.
  • Inventory is not as understated as under LIFO, but it is not as up-to-date as under FIFO.
  • Summarize the differences between LIFO, FIFO and Specific Identification and explain how a company would use that information to select an inventory method