Inventory Write-Down (FIFO-LIFO)

CFA Level II
#1

Hello everyone,

if inventories prices are increasing, LIFO method is less likely to impair its inventory and if it does it will be of a lesser magnitude.

but if inventories prices face downward pressure (ie decrease). In that case, is FIFO inventory the less likely to recognize an impairment?

Thanks for your help

Phil

#2

Yes - if inventory prices decrease so much that it goes below the cost of units currently sitting in the inventory. In such case, there is for sure a write down since FV < carry will be ascertained.

#3

Correct. In FIFO, inventory is made up of the most recent purchases which reflect the current lower prices. This will make it less likely to writedown current inventory, at least of a lesser magnitude than it othewise would with a LIFO inventory. Also note, with FIFO reporting company and downward pressure on prices, COGS will be higher (than LIFO), and margins will be lower.