Firstly do you understand the concept of last in first out and first in first out?
In LIFO, last item is always the most expensive, because it’s a recently purchased item.
In FIFO (imagine this as a queue for the new iPhone – first person who gets into the queue will get it first and they are usually the ones who waited the longest), hence in a bull market, the first item is always the cheapest (since it was purchased at a very early stage).
LIFO – will have the highest COGS since the most expensive item is used first
FIFO – will have the lowest COGS since the cheapest item is used first
Therefore: LIFO COGS > FIFO COGS
Which also means LIFO Inventory < FIFO Inventory, this is because in LIFO you sold the most expensive items first so what's left are the cheapest items. Since, LIFO Inventory < FIFO Inventory, so when it comes to converting LIFO to FIFO, you have to plus the reserve to make them ‘equal’ or comparable.
Likewise, to convert from FIFO to LIFO inventory you have to minus the reserve.
In a bear market, it will be the opposite since recently purchased item is the cheapest.
Hope that helps.
Try not to memorise it but to understand the concept and you’ll remember it for life.
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