There is no precise mathematical equation to convert FIFO accounting to LIFO because the equivalent of the FIFO reserve does not exist. Furthermore, there is little value in converting inventory under FIFO to LIFO, since LIFO inventory is not a reflection of the true economic value of inventory. Nonetheless, analysts can estimate what the inventory and COGS would have been if the company used the LIFO accounting method.

Analysts would first need to estimate what the beginning inventory would have been under LIFO. Inventory can be affected by economic inflation, inflation of raw assets with a particular industry, among others. As a result, COGS (LIFO) can be estimated by using this formula:

COGS (LIFO) = COGS (FIFO) + [beginning inventory (FIFO) * (adjustment or inflation rate)]

Looking at a company within a similar industry that uses the LIFO method can also be done to derive the adjustment rate.

Adjustment rate = LIFO reserve / beginning inventory (LIFO)

Converting Average-cost Method to LIFO
As stated previously, since the average-cost method is a simple average of COGS, COGS would be in between LIFO and FIFO.

COGS (LIFO) = COGS (average) - Â½ * (beginning inventory (Average) * (adjustment or inflation rate)

Effects of Inventory Accounting

Related Articles
1. Investing

When & Why Should a Company Use LIFO

By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.

Here we offer some cost-saving measures to strengthen your business even when the market is weak.

Understanding First In, First Out (FIFO)

A company that uses the first in, first out inventory valuation method will sell, use, or dispose of assets that it produced or acquired first.
4. Investing

International Financial Reporting Standards

Learn about the purpose of the IFRS, as well as its benefits, goals and fundamental difference from the U.S. GAAP.
5. Investing

How to Analyze a Company's Inventory

Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
6. Insights

What You Should Know About Inflation

Find out how this figure relates to your investment portfolio.
7. Taxes

Using Tax Lots: A Way To Minimize Taxes

The method of identifying cost basis can help you to get the most out of reduced tax rates.
8. Investing

9. Investing

Operating Income

Amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation.