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) - ½ * (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.
  2. Small Business

    Build Your Small Business During Downswings

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

    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

    Examining Costs Of Goods Sold (COGS)

    Learn more about the costs that go into production.
  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.
Frequently Asked Questions
  1. Where do most fund managers get their market information?

    Many fund managers, whether they manage a mutual fund, trust fund, pension or hedge fund, have access to resources that the ...
  2. What's the difference between short-term investments and marketable securities?

    Understand the difference between short-term investments and marketable equity securities, and learn the importance of short-term ...
  3. Are fringe benefits direct or indirect costs?

    Learn how to allocate costs associated with fringe benefits provided to employees and how to determine when a cost is either ...
  4. How is a bank guarantee different from a traditional loan?

    Read about the differences between a traditional bank loan and a bank guarantee, and why a third party might require a guarantee ...
Trading Center