LIFO and FIFO

What it means

Inventory cost-flow assumptions. FIFO expenses the oldest costs first; LIFO expenses the newest.

The exam angle

LIFO is permitted under US GAAP and prohibited under IFRS. When prices rise, LIFO gives lower income and lower inventory — the LIFO reserve converts between the two.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.

Related terms

• Accrual accountingRecognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.
• Balance sheetA statement of what a company owns and owes at a single point in time.
• Book valueThe accounting value of equity: assets less liabilities as reported.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.
• Cash flow from operationsCash generated by the core business, before investment and financing.
• Current ratioCurrent assets divided by current liabilities, a rough test of short-term solvency.