Page 12 - FINAL CFA I SLIDES JUNE 2019 DAY 8

LOS 28.e: Explain LIFO reserve and LIFO liquidation and their
effects on AFS and ratios., p.186 Session Unit 8:
LOS 28.f: Convert reported AFS from LIFO to FIFO for 28. Inventories
purposes of comparison. , p.186

LIFO Liquidation, p.189 Decline in the LIFO reserve (LIFO – FIFO inventory) if inventory

prices (deflation) or inventory levels begin to falling!

Gross profits, EBIT, and Net Income.

Decreased cash expenses (lower payments or not producing inventory) will increase operating cash
tanties
flow, although higher income taxes on higher earnings will partially offset this increase in cash flows.

Increases in profit margins from LIFO liquidation are not sustainable, however, because a

firm cannot continue forever to sell existing inventory without replenishment.

• Management could use a LIFO liquidation to artificially inflate current earnings;

• Inventory declines can also be caused by:
• events outside management’s control, such as strikes or materials shortages at a key supplier;
• Decline in expected customer orders resulting in voluntary reduction to suit market conditions.

Check LIFO liquidation/reserve issues from the footnotes to inventory!

Lets check LIFO liquidation in numbers…