CFA Latest CFA Level 2 Discussions LIFO TO FIFO


  • This topic has 1 reply, 2 voices, and was last updated Oct-17 by vincentt.
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    • CFA_redemption_12713

      One of the topics I’m having the hardest time remembering is the conversion from LIFO to FIFO, anyone pick up any tricks or ways to easily remember the sequence??? Thanks

    • vincentt

      Firstly do you understand the concept of last in first out and first in first out?

      Rising Market:
      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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