📊 Financial Statement Analysis

FIFO vs LIFO — Inventory Valuation Methods Compared

FIFO vs LIFO inventory valuation explained. Impact on financial statements, COGS, taxes, and when to use each method. CFA Level 1 study guide.

Key Concepts

FIFO

First In, First Out. Ending inventory reflects recent costs (closer to replacement cost). In rising prices: higher income, higher inventory.

LIFO

Last In, First Out (US GAAP only). COGS reflects recent costs. In rising prices: lower income (tax savings), lower inventory, better cash flow.

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Formulas

From this module

FIFO Inventory from LIFO

FIFO Inventory = LIFO Inventory + LIFO Reserve

Where: To make LIFO companies comparable to FIFO

FIFO COGS from LIFO

FIFO COGS = LIFO COGS - ΔLIFO Reserve

Where: Δ = change in LIFO reserve during period

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Master Formula Sheet -- Financial Statement Analysis

Basic EPS

EPS = (NI - Pref Div) / Wtd Avg Shares

Earnings per common share

Diluted EPS

Diluted EPS = (NI - Pref Div + Convertible Interest) / (Shares + Dilutive Securities)

Treasury stock method for options

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Decision Frameworks

FIFO vs LIFO in rising prices?

Use when:

  • FIFO: higher income, higher BS inventory, higher taxes
  • LIFO: lower income, lower taxes (cash flow benefit), lower BS inventory

Avoid when:

  • Comparing a LIFO company to a FIFO company without adjusting

Test Your Understanding

In a period of rising prices, compared to FIFO, LIFO will report:

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