If a company changes from LIFO to FIFO, how would that impact its financial statements?
The answer says that assuming costs are increasing, LIFO to FIFO will increase COGS and thereby decrease Net Income. It will also reduce taxes and inventory.
However, my understanding is LIFO (high COGS) to FIFO (low COGS) decrease COGS and thereby increase Net Income. Please advise!
| +119 | I think I’m logging off after ER visit | 23 | 1d |
| +103 | Is it Bad That I ALREADY Don’t Care? | 31 | 8h |
| +103 | AI Creating More Work | 33 | 30m |
| +94 | Senior Banker's Guide to IB Recruiting / Group Placement (with a Healthcare Bent) | 10 | 13h |
| +64 | Shit PWP Culture | 52 | 23m |
| +59 | Consulting Son or CorpDev Daughter? | 6 | 4d |
| +44 | How easy was recruiting for you? | 21 | 5d |
| +36 | 22yo IB Analyst just had mental health breakdown | 11 | 1d |
| +26 | Is the life of a VP at a 'top-bank' really good? | 6 | 20h |
| +22 | Law school instead of MBA for RX Banking | 3 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
If costs are increasing, switching from LIFO to FIFO means that your inventory sold will now consist of the inventory that was least recently purchased. Since the least recently purchased inventory is cheaper (assuming an inflationary environment), the FIFO COGS will be lower. As a result, net income will be higher.
The answer you have been provided is either wrong, or you are omitting an important detail. Out of curiosity, did you find this question on the CFA Institute website's question bank for Level 1-2? If yes, some of the questions do have typos and/or errors either in the question or in the answer. You can often spot these errors by looking at comments written by other CFA candidates right underneath the question.
You are assuming that inventory costs are increasing, which may not be the case.
Commodi sint quod est nulla. Quo expedita voluptatem quo aut doloribus explicabo voluptatem.
Quasi voluptatem molestiae quos ipsa. Officiis sed sit eveniet explicabo. Ipsam expedita sunt alias et. At quis magni reiciendis earum. At ipsum eveniet ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...