CFA CFA Level 1 FIFO/LIFO

FIFO/LIFO

  • This topic has 5 replies, 4 voices, and was last updated Apr-17 by Avatar of SnippySnippy.
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    • Avatar of SnippySnippy
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      • CFA Level 2
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        In certain questions, it is asked whether ending inventory, COGS, gross profit etc are higher or lower under FIFO and LIFO.
        But we know certain things already, i.e., under LIFO, COGS are higher, gross profit is lower et al. So when such a question comes up with values and calculations implied, is it better to just apply the pre-existing concepts or should we be safer and do the calculations?

        Just wondering. Though, paranoid me will do the calculations too eitherways.

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        Apply concepts you should be able to eliminate options easily. If you’ve time just calculate to be sure I suppose.

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        @sidmenon

        I think its way better to go conceptually because you know that

        Inflationary environment: prices going up
        LIFO –> last in first out so you’re expensing the expensive stuff from closer to current time
        FIFO –> first in first out so you’re expensing cheaper stuff
        Weighted average –> averages (expense is in between the number you would get for LIFO and FIFO)

        opposite for deflationary environment (decreasing prices)
        LIFO –>expensing expensive stuff
        FIFO –> expensing cheaper stuff

        the above is directly related to COGS

        Gross profit = revenue minus COGS

        so reverse relationship with the above (i.e. if COGS up, Gross profit down)

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        @SidMenon I use my intuition to ensure to make my calculations match what I think the answer is.
        This is useful when they throw a curve such a most likely/least likely.
        So if the calculation doesn’t match the answer I think it should be I know I read the question wrong. lol – which I seem to do way too often for my liking.

      • Avatar of SnippySnippy
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        • CFA Level 2
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          I know the concepts properly, so I think i’ll just quickly do the calculations to confirm my answer.

        • Avatar of SnippySnippy
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          • CFA Level 2
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            Haha, i like your alternative too 😛

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