lifo VS fifO

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cfaiscomplex

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i am still confused with what happens when LIFO reserve decreases.....I came across a question in the mock exam 2 that talks about decrease in LIFO reserve, COGS FIFO increase but FIFO Inventory would also be higher...is that correct?
 
that is correct if the lifo reserve decreases but stays above 0
 
so lifo liquidataion has no effect on inventory? it only effects COGS? is there any other effect?
 
All the downstream impacts.

You have lower COGS, higher net income and.. oh boy.. higher taxes..

The liquidation will have an economic impact on the firm as seen through the cash tax requirement.

To avoid this, LIFO accounting firms need to keep increasing, or at least maintain, those LIFO layers or else the tax penalty can be huge.
 
cfaiscomplex Wrote:
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> i am still confused with what happens when LIFO
> reserve decreases.....I came across a question in
> the mock exam 2 that talks about decrease in LIFO
> reserve, COGS FIFO increase but FIFO Inventory
> would also be higher...is that correct?


firms "dip" into old lifo invetory laters to prop up earnings, once an analst catches this, they make the changes necessary to increase the firms COGs to a more realistic level.

recal that LIFO undetrsteas inventory on b/sheet and overstates COGS (assuming rising prices) on the income stmt
 
thanks mcf so the answer to question 50 in mock 2 is A then??? ...not sure if you have the question...

answer is lower cogs but higher inventory?
 
cfaiscomplex Wrote:
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> thanks mcf so the answer to question 50 in mock 2
> is A then??? ...not sure if you have the
> question...
>
> answer is lower cogs but higher inventory?


please post it, all i got is CFAI books
 
dont have the question, just took the test....it talked about lifo reserve decreasing, what would be the effect of cogs and inventory...will it increase or decrease?.....
 
cfaiscomplex Wrote:
-------------------------------------------------------
> dont have the question, just took the test....it
> talked about lifo reserve decreasing, what would
> be the effect of cogs and inventory...will it
> increase or decrease?.....


i think lower COGS and lower inventory, if reserve is going down, they are dipping into it i think
 
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