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FIFO vs LIFO Impact on Financial Statements

Compare FIFO and LIFO effects on COGS, inventory, gross profit, taxes, and ratios.

TL;DR

When prices rise, FIFO reports lower COGS, higher ending inventory, higher profit, and higher taxes than LIFO. LIFO reports lower taxable income but lower inventory and equity.

Formula Reference

Gross profit

Gross profit = sales - COGS

Inventory method changes COGS and gross profit.

LIFO reserve

LIFO reserve = FIFO inventory - LIFO inventory

Used to convert LIFO statements toward FIFO comparability.

BA II Plus Keystrokes

  1. Compute COGS under each inventory method.
  2. Subtract COGS from sales for gross profit.
  3. Apply tax rate to pretax income difference.
  4. Use STO/RCL for inventory and COGS differences.

Worked Example

  • Rising prices: FIFO COGS is 600, LIFO COGS is 700, sales are 1,000.
  • FIFO gross profit = 400; LIFO gross profit = 300.
  • FIFO reports higher profit and higher ending inventory.

Common Mistakes

  • Reversing the rising-price relationship.
  • Forgetting that lower COGS increases taxes.
  • Ignoring balance sheet effects on inventory and equity.

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