115 CFA
File: Financial Analysis - Reading 25 - 4. The LIFO Method

4. The LIFO Method

e. explain LIFO reserve and LIFO liquidation and their effects on financial statements and ratios;

f. convert a company's reported financial statements from LIFO to FIFO for purposes of comparison;

What is a LIFO reserve?
- In the U.S., firms that use LIFO must report a LIFO reserve. The LIFO reserve is the difference between the inventory balance shown on the balance sheet and the amount that would have been reported had the firm used FIFO. That is:
- $$Inventory_{FIFO} = Inventory_{LIFO} + LIFO\ Reserve$$

What is the formula to use when adjusting COGS from LIFO to FIFO?
$$COGS_{FIFO} = COGS_{LIFO} - Change\ in\ LIFO\ Reserve$$

What is LIFO liquidation?
When a firm reduces its inventory, the old assets flow into income. The COGS figure no longer reflects the current cost of inventory sold.

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