LIFO Liquidation and a Declining LIFO Reserve
A declining LIFO reserve can indicate inventory liquidation or falling prices. If LIFO reserve declines in a rising price environment, then the analyst might become suspicious that current profit margins are over-stated because older goods are being sold and not replaced. Replacing these goods at current cost might be higher than COGS is indicating.
The company, for whatever reason, may have stopped purchasing new, more expensive products, and in anticipation of a business slowdown and has begun selling off older inventory.
LIFO Inventory Liquidation in a Falling Price Environment
LIFO will show higher profit in a falling price environment. If prices continue falling (possibly due to business cycle changes), then a company may cease to purchase new inventory. As a LIFO business depletes its recent low cost inventory in a deflationary climate, profit margins will later go through a period of contraction when the company begins to sell its older, higher cost inventory.
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- 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