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Transcript of FIFO/LIFO
valuation method during the onset of IFRS Historical context What is FIFO? What is LIFO? Last-in, first-out.
The newest inventory items are recorded as sold first.
A relatively new inventory accounting method dating back to the great depression. The base-stock method was its predecessor. Implications of FIFO Matches revenues against the initial cost of inventory.
Higher net income for rising prices.
Lower COGS for rising prices.
Higher ROE, lower DIR, lower CR Implications of LIFO Matches current revenues against current costs.
Understated net income for rising prices.
Overstated COGS for rising prices.
Lower ROE, higher DIR, higher CR Criticism against LIFO Going forward LIFO vs FIFO IMPACT on net income, total assets
and noncurrent liabilities First-in, first-out.
The oldest inventory items are recorded as sold first.
Most commonly practiced inventory accounting method and the bases for inventory tax rules. Tax loop-hole
Permanent tax holiday
Inferior balance sheet
Not IFRS conform (true and fair view) Profiteers Oil & Steele
Do not recognize historical gains in their inventories Exxon Mobil AK Steel Measures
already in place
Book tax conformity rule
(But LIFO reserves disclosed in footnotes)
SEC approval required Firms preferred FIFO during
the Great Depression.
After the economy started
picking up the base-stock
method was introduced.
LIFO ensued. JIT systems LIFO must be rejected before
IFRS is implemented by firms