Lessons
- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations
Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
| FINANCIAL STATEMENT/RATIO | FIFO | LIFO |
|---|---|---|
| Net Income and Profit Margins | Usually higher in a rising price environment. | Usually lower in a rising price environment. |
| Pre-tax Cash Flow | Same. | Same. |
| After-tax Cash Flow | Usually lower in a rising price environment because a company is reporting higher net income due to lower COGS. | Usually higher in a rising price environment because a company is reporting lower net income due to higher COGS. |
| Current Ratio = Current Assets/Current Liabilities | Usually higher in a rising price environment because reported inventories are more valuable and COGS is lower. | Usually lower in a rising price environment because reported inventories are based on lower cost purchases and higher COGS. |
| Inventory Turnover = COGS/Avg. Inventory | Usually lower in a rising price environment because the average cost of inventory will be higher. | Usually higher in a rising price environment because the average cost of inventory will be lower. |
| Debt-to-Equity Ratio = Total Interest Bearing Debt/Total Shareholders' Equity | Usually lower in a rising price environment. | Usually higher in a rising price environment. |
| Return on Assets =Net Income/ Avg. Total Assets Return on Equity = Net Income / Avg. Total Equity | Usually higher in a rising price environment because net income is higher. | Usually lower in a rising price environment because net income is lower. |
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