I cannot figure out this problem, especially where they came up with the $10 million increase in LIFO reserve.
At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost of goods sold (COGS) of $64 million, and inventory purchases of $58 million. If the LIFO reserve was $6 million at the end of 2006 and $16 million at the end of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS for the year ended 2007.
ANSWER:
2007 FIFO inventory was $36 million ($20 million LIFO inventory + $16 million reserve). 2007 FIFO COGS was $54 million ($64 million LIFO COGS – $10 million increase in LIFO reserve).
Any help?
I believe that the increase in the LIFO reserve can be calculated as:
ΔLIFO reserve = Ending LIFO reserve – beginning LIFO reserve
=$16 million - $6 million
= $10 million.
Makes sense. I guess I didn’t remember reading that we have to subtract the “change” in reserve from the COGS. Thanks for the confirmation!
My pleasure.
Remember that a balance sheet is a static document – it shows where you are at a moment in time – but an income statement (and a statement of cash flows, for that matter) is a dynamic document: it shows how things changed over a period of time. Thus, the adjustment on the income statement has to incorporate the change in the LIFO reserve, not merely one LIFO reserve value at one moment in time.
So let me get this straight:
First of all, the Inventory purchase of 58 is just given to confuse us. 
Second of all,
To get the FIFO inventory, we need to add the current year LIFO reserves to the current year inventory level reported under LIFO.
To get the FIFO COGS, we need to substract the increase in LIFO reserves from the current year’s COGS.
Any logic behind the addition and substraction?
(Ending inventory + COGS = goods available for sale. When ending inventory goes up (as when you keep the new, higher prices instead of the old, lower prices), COGS goes down (as when you sell the old, lower prices instead of the new, higher prices).)
What page in volume 3 does it talk about FIFO/LIFO reserve? I don’t remember this.
Guys need some help with the basics first.
What is the difference between the LIFO reserve and the LIFO inventory level?
The LIFO reserve is the amount you need to add to the LIFO inventory to get FIFO inventory. A company that uses LIFO is required to compute this value and include it in the footnotes.
So, if the ending inventory under LIFO were, say, $1,000 and the LIFO reserve were $300, then if the company had been using FIFO inventory, its ending inventory would have been $1,300.