CFA Level IFinancial Statement AnalysisMedium
A company using LIFO reports cost of goods sold of $2,000,000. The LIFO reserve was $60,000 at the beginning of the year and $80,000 at the end of the year. What would COGS have been if the company had used FIFO?
- A$1,980,000
- B$2,080,000
- C$2,020,000
- D$1,920,000
Show answer & explanationAnswer & explanation
Correct answer: A. $1,980,000
FIFO COGS = LIFO COGS − increase in LIFO reserve. The LIFO reserve increased by $20,000 (80,000 − 60,000). FIFO COGS = 2,000,000 − 20,000 = $1,980,000.
Why the other options are wrong
- B. Incorrect — adds the ending reserve balance instead of the change.
- C. Incorrect — adds the change instead of subtracting it.
- D. Incorrect — subtracts too much; uses the ending reserve instead of the change.
LIFO Reserve Adjustment
The LIFO reserve is the difference between LIFO and FIFO inventory values; its change is used to convert LIFO COGS to an equivalent FIFO basis.
- FIFO Inventory = LIFO Inventory + LIFO Reserve
- FIFO COGS = LIFO COGS − Increase in LIFO Reserve
- Used to compare firms using different inventory methods
Memory trick: Reserve grows, COGS shrinks when converting to FIFO