Inventory Valuation Methods (LIFO, FIFO)

What this video covers

• What inventory valuation determines: cost of goods sold on the income statement and the inventory balance on the balance sheet
• How First-In, First-Out (FIFO) works: oldest inventory assumed sold first, so older prices flow to cost of goods sold and newer costs remain in ending inventory
• How Last-In, First-Out (LIFO) works: newest inventory assumed sold first, so newer prices flow to cost of goods sold and older costs remain in ending inventory
• Why FIFO produces higher earnings, higher taxes, and a stronger balance sheet in a rising-price environment, while LIFO produces lower earnings, lower taxes, and higher cash flow from tax savings
• Why LIFO is prohibited under International Financial Reporting Standards (IFRS) but permitted under US Generally Accepted Accounting Principles (GAAP), and what happens when a company switches to IFRS
• Why a change in inventory method is not a free choice: it requires disclosure and tax authority approval, and the method is treated as sticky once chosen
• How to reverse all effects mentally when prices are falling rather than rising