Inventory accounting - FIFO vs LIFO - Is this disclosed in ARs?

[Nebula]

Hi all,

i have never come across local annual report that uses LIFO and only on a handful of occasions have i come across FIFO.

most of the time lower of cost or net realisable value is used.

in my observations, companies will write off inventory that has become obsolete and charge it as a write down expense in the P&L.

IMHO this method of accounting makes more sense than either LIFO or FIFO as it gives a more accurate picture, however, for companies selling finished goods such as retail, we have to factor in potential write downs.

small amounts of write downs can usually be seen every year, but sometimes there are shockers where a large amount of inventory is written of in a single year. i guess a way to protect from such write downs is to pay a cheap price for the assets so that a large write down in a single year does not set you too far back.

[CityFarmer]

Hi all,

i have never come across local annual report that uses LIFO and only on a handful of occasions have i come across FIFO.

most of the time lower of cost or net realisable value is used.

in my observations, companies will write off inventory that has become obsolete and charge it as a write down expense in the P&L.

IMHO this method of accounting makes more sense than either LIFO or FIFO as it gives a more accurate picture, however, for companies selling finished goods such as retail, we have to factor in potential write downs.

small amounts of write downs can usually be seen every year, but sometimes there are shockers where a large amount of inventory is written of in a single year. i guess a way to protect from such write downs is to pay a cheap price for the assets so that a large write down in a single year does not set you too far back.

The FIFO and "lower of cost or net realisable value" isn't mutually exclusive, as far as I have understood. They are referring to a slightly different things.

[Nebula]

Hi all,

i have never come across local annual report that uses LIFO and only on a handful of occasions have i come across FIFO.

most of the time lower of cost or net realisable value is used.

in my observations, companies will write off inventory that has become obsolete and charge it as a write down expense in the P&L.

IMHO this method of accounting makes more sense than either LIFO or FIFO as it gives a more accurate picture, however, for companies selling finished goods such as retail, we have to factor in potential write downs.

small amounts of write downs can usually be seen every year, but sometimes there are shockers where a large amount of inventory is written of in a single year. i guess a way to protect from such write downs is to pay a cheap price for the assets so that a large write down in a single year does not set you too far back.

The FIFO and "lower of cost or net realisable value" isn't mutually exclusive, as far as I have understood. They are referring to a slightly different things.

yes, they are not the same thing.

i meant that only in a handful of reports i have come across are inventories recorded using FIFO method.
most of the time inventories are accounted using "lower of cost or net realisable value" which is different from LIFO and FIFO.

[CityFarmer]

yes, they are not the same thing.

i meant that only in a handful of reports i have come across are inventories recorded using FIFO method.
most of the time inventories are accounted using "lower of cost or net realisable value" which is different from LIFO and FIFO.

An inventories can be both FIFO (or LIFO which is rare) and "lower of cost or net realisable value".

Inventories can be measured at "lower of cost or net realisable value", while the "cost" is base on FIFO principle.

I hope my English serves me well this round

[Nebula]

yes, they are not the same thing.

i meant that only in a handful of reports i have come across are inventories recorded using FIFO method.
most of the time inventories are accounted using "lower of cost or net realisable value" which is different from LIFO and FIFO.

An inventories can be both FIFO (or LIFO which is rare) and "lower of cost or net realisable value".

Inventories can be measured at "lower of cost or net realisable value", while the "cost" is base on FIFO principle.

I hope my English serves me well this round

i see.

so FIFO is used in determining cost of goods sold in the P&L and "lower of cost or net realisable value" is used to determine the value of inventory on the balance sheet.

[GFG]

yes, they are not the same thing.

i meant that only in a handful of reports i have come across are inventories recorded using FIFO method.
most of the time inventories are accounted using "lower of cost or net realisable value" which is different from LIFO and FIFO.

An inventories can be both FIFO (or LIFO which is rare) and "lower of cost or net realisable value".

Inventories can be measured at "lower of cost or net realisable value", while the "cost" is base on FIFO principle.

I hope my English serves me well this round

yup, CF is right.
FIFO or LIFO can both be "lower of cost or net value"
That's the amount recorded in BS
whereas FIFO or LIFO or weighted average describes the movement of inventory and how the value of COGS is derived.
Based on FRS, all the inventory is always recorded as "lower of cost or net realisable value"

[PGL]

yes, they are not the same thing.

i meant that only in a handful of reports i have come across are inventories recorded using FIFO method.
most of the time inventories are accounted using "lower of cost or net realisable value" which is different from LIFO and FIFO.

An inventories can be both FIFO (or LIFO which is rare) and "lower of cost or net realisable value".

Inventories can be measured at "lower of cost or net realisable value", while the "cost" is base on FIFO principle.

I hope my English serves me well this round

yup, CF is right.
FIFO or LIFO can both be "lower of cost or net value"
That's the amount recorded in BS
whereas FIFO or LIFO or weighted average describes the movement of inventory and how the value of COGS is derived.
Based on FRS, all the inventory is always recorded as "lower of cost or net realisable value"

[PGL]

The FIFO/LIFO explanations are now clear.
What is still not clear to me is how losses or gains on Inventory held as an asset are accounted for?
For example, if the Oil Price goes down, so does the value of the Inventory held as an asset, and vice versa on the way up.
Is this loss(or gain) provisioned for (or booked as a revaluation gain) in the Income Statement or is this asset simply written down in the Balance Sheet without impacting the Income Statement.
If the former, we are headed for lower EPS in 2015 for companies carrying Oil Inventories.
PGL

[GFG]

The FIFO/LIFO explanations are now clear.
What is still not clear to me is how losses or gains on Inventory held as an asset are accounted for?
For example, if the Oil Price goes down, so does the value of the Inventory held as an asset, and vice versa on the way up.
Is this loss(or gain) provisioned for (or booked as a revaluation gain) in the Income Statement or is this asset simply written down in the Balance Sheet without impacting the Income Statement.
If the former, we are headed for lower EPS in 2015 for companies carrying Oil Inventories.
PGL

It cannot be written down in the BS without impacting the income statement, unless there have been provisions made in prior years.
In that case, the amt written off would still be charged to income statement but in an earlier year.
So if the value of inventory is adjusted, it will show up on income

[CityFarmer]

The FIFO/LIFO explanations are now clear.
What is still not clear to me is how losses or gains on Inventory held as an asset are accounted for?
For example, if the Oil Price goes down, so does the value of the Inventory held as an asset, and vice versa on the way up.
Is this loss(or gain) provisioned for (or booked as a revaluation gain) in the Income Statement or is this asset simply written down in the Balance Sheet without impacting the Income Statement.
If the former, we are headed for lower EPS in 2015 for companies carrying Oil Inventories.
PGL

It cannot be written down in the BS without impacting the income statement, unless there have been provisions made in prior years.
In that case, the amt written off would still be charged to income statement but in an earlier year.
So if the value of inventory is adjusted, it will show up on income

I am not an accountant. With a limited understanding, here is what I know

Write-downs of inventory to net realisable value, is done as an expense of cost of inventories sold. The same for the reversals of the write-down.