{"id":21874,"date":"2020-01-22T17:41:04","date_gmt":"2020-01-22T22:41:04","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21874"},"modified":"2024-08-01T19:15:05","modified_gmt":"2024-08-02T00:15:05","slug":"lifo-vs-fifo","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/lifo-vs-fifo\/","title":{"rendered":"Inventory and COGS: LIFO vs FIFO (13:39)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Inventory and COGS: LIFO vs FIFO<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/lifo-vs-fifo\/#Why_LIFO_vs_FIFO_Matters\">Why LIFO vs. FIFO Matters<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Why_LIFO_vs_FIFO_Matters\"><\/span>Why LIFO vs. FIFO Matters<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In our 3-statement &#8220;interview question&#8221; model, we assumed that <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">COGS<\/a> = Decrease in Inventory over a specific period.<\/p>\n<p>So the implicit assumption is:<\/p>\n<p>Change in Inventory = Beginning Inventory + Purchases &#8211; COGS.<\/p>\n<p><strong>PROBLEM:<\/strong> What do you actually list for COGS? After you buy the Inventory, what should you record for the cost of Inventory once it&#8217;s actually sold?<\/p>\n<p>Example: Let&#8217;s say you order 100 units during the course of the year, and initially they cost you $10 each&#8230; but by the end of the year the cost has increased to $20 each.<\/p>\n<p>When you sell 10 units, do you use 10 * $10 for COGS, or 10 * $20?<\/p>\n<p>That&#8217;s the core problem you face when recording COGS and Inventory, and there are 2 methods for handling it:<\/p>\n<p>LIFO (Last In, First Out): You use the cost of the latest items purchased (10 * $20).<\/p>\n<p>FIFO (First In, First Out): You use the cost of the earliest items purchased (10 * $10).<\/p>\n<p>It&#8217;s not about which one is &#8220;better,&#8221; but more about the trade-offs between these two methods &#8212; how are Net Income, Inventory, and COGS affected?<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>Impact on Net Income, Inventory, and COGS<\/p>\n<p>If inventory costs have been INCREASING:<\/p>\n<p>LIFO: Higher COGS, lower Net Income, and a lower ending Inventory balance.<\/p>\n<p>FIFO: Lower COGS, higher Net Income, and a higher ending Inventory balance.<\/p>\n<p>If inventory costs have been DECREASING:<\/p>\n<p>LIFO: Lower COGS, higher Net Income, and a higher ending Inventory balance.<\/p>\n<p>FIFO: Higher COGS, lower Net Income, and a lower ending Inventory balance.<\/p>\n<p>Compromise: Take the average numbers under both methods (many US-based companies do this in real life).<\/p>\n<p>This comes up in real life all the time, so you need to be aware of it &#8212; and possibly be ready to make adjustments on the financial statements if companies you&#8217;re comparing are using different standards for inventory and COGS.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this lesson, you&#8217;ll learn how Inventory and Cost of Goods Sold (COGS) differ under the LIFO (Last-In, First-Out) and FIFO (First-In, First-Out) methods.<\/p>\n","protected":false},"featured_media":21882,"template":"","class_list":["post-21874","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21874","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21882"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}