Module 25.3: Converting LIFO to FIFO

Question 1

When prices are rising describe how LIFO compared to FIFO, what if prices are falling?

Answer 1

When prices are rising, firms that report under LIFO will report lower inventory values and higher cost of goods sold.

When prices are falling, firms that report under LIFO will report higher inventory values and lower cost of goods sold.

Question 2

Explain the four ratios that exist for LIFO when the prices are rising over the relevant period?

Answer 2

1) Lifo Inventory < Fifo inventory
2) Lifo COGS > Fifo COGS
3) LIFO net income < FiFo net income
4) LIFO tax < FIFO tax

Question 3

Explain the four ratios that exist for LIFO when prices are falling over the relevant period?

Answer 3

1) Lifo inventory > fifo inventory
2) Life Cogs < fifo COGS
3) LIFO net income > fifo net income
4) Lifo tax > fifo tax

Question 4

What is the LIFO reserve?

Answer 4

firms that report under LIFO must report a LIFO reserve, the amount by which LIFO inventory is less than FIFO inventory.

Question 5

How do you compare financial statements between LIFO and FIFO firms?

Answer 5

1) Add the lifo reserve to LIFO inventory on the balance sheet
2) increase the retained earnings component of shareholders equity by the LIFO reserve
3) adjust cash by the LIFO reserve times the tax rate.

Question 6

What is the formula for FIFO Cogs if given LIFO financials?

Answer 6

FIFO COGS = LIFE COGS - (ending LIFO reserve - beginning LIFO reserve)

Question 7

What is the formula for FIFO net income if given LIFO financials?

Answer 7

FIFO net income = LIFO net income + 1 * (1-tax rate) * (ending LIFO reserve - beginning LIFO reserve)

Question 8

In period of increasing prices, how does LIFO affect profitability?

Answer 8

LIfo produces higher COGS, resulting in lower earnings.

Question 9

In period of increasing prices, how does LIFO affect liquidity?

Answer 9

Results in lower inventory value on the balance sheet. Current ratio is lower under LIFO and working capital is also lower.

Question 10

In period of increasing prices, how does LIFO affect activity?

Answer 10

Inventory turnover is higher for firms that use LIFO becuase COGS is higher, and inventory is typically lower.

Question 11

In period of increasing prices, how does LIFO affect Solvency?

Answer 11

Debt ratio and debt-to-equity are higher under LIFO compared to FIFO (not good).

Question 12

When does a LIFO liquidation occur?

Answer 12

occurs when a LIFO firm’s inventory quantitates decline.

Question 13

What does a LIFO liquidation do to the financial statements?

Answer 13

decrease COGS and increase gross profits, pretax income. and net income.