How to Find LIFO on Financial Statements & Calculate It

The Last-In, First-Out (LIFO) inventory valuation method assumes that the most recently acquired inventory items are the first ones sold. This method impacts a company’s cost of goods sold (COGS) and the reported value of its ending inventory. Companies in the United States often use LIFO for financial reporting and tax purposes, as permitted under U.S. Generally Accepted Accounting Principles (GAAP).

Identifying LIFO Information on Financial Statements

Companies employing the LIFO method present its impact across their financial statements. The “Inventory” line item on the balance sheet reflects the value of ending inventory, representing the cost of the oldest units remaining.

The income statement’s cost of goods sold (COGS) figure incorporates the LIFO assumption. Under LIFO, the most recent, and often higher, costs are expensed first, potentially leading to a higher COGS during periods of rising prices.

The most detailed information regarding a company’s inventory costing method is typically found within the notes to the financial statements. Companies are required to disclose their significant accounting policies, including the method used for valuing inventory. Readers should look for a section titled “Summary of Significant Accounting Policies” or a specific “Inventory” note. This section will explicitly state whether the company uses LIFO, along with other methods like FIFO (First-In, First-Out) or weighted-average cost.

Understanding and Locating the LIFO Reserve

The LIFO reserve represents the difference between the inventory value calculated using the First-In, First-Out (FIFO) method or the average cost method, and the inventory value calculated under the LIFO method. This amount is typically presented as a contra-asset account. Its purpose is to allow financial statement users to adjust a company’s reported LIFO inventory figures to a FIFO basis, enabling better comparability with companies that use different inventory methods.

Companies disclose the LIFO reserve in the notes to their financial statements, often within the detailed inventory disclosures. This disclosure helps users understand the financial impact of using LIFO, especially in inflationary environments where LIFO generally results in lower reported inventory values and higher COGS compared to FIFO. An analyst might find a statement such as, “The excess of FIFO cost over LIFO cost was $20,000 at year-end.”

For example, if a company’s inventory is reported at $80,000 using LIFO, and the notes disclose a LIFO reserve of $20,000, then the inventory value under FIFO would be $100,000. Adjusting for the LIFO reserve can impact reported inventory, cost of goods sold, and retained earnings, providing a more consistent view of a company’s financial health for comparative analysis.

Step-by-Step LIFO Inventory Calculation

Calculating inventory values using the LIFO method involves tracking the flow of costs based on the assumption that the last units purchased are the first ones sold. This approach directly influences both the cost of goods sold (COGS) and the valuation of ending inventory. Companies internally apply this principle to their purchase and sales data to arrive at the figures reported on their financial statements.

Consider a simplified example: a company begins with an opening inventory of 10 units at $10 each. On January 15, it purchases 20 units at $12 each. Then, on January 20, it purchases another 15 units at $15 each.

If the company sells 25 units on January 25, the LIFO method dictates that the 25 units sold are assumed to come from the most recent purchases. Therefore, 15 units would be expensed at $15 each (from the January 20 purchase), and the remaining 10 units would be expensed at $12 each (from the January 15 purchase). The total Cost of Goods Sold for this sale would be (15 units $15) + (10 units $12) = $225 + $120 = $345.

Following this sale, the remaining inventory would consist of the earliest units. In this case, 10 units from the initial opening inventory at $10 each, and 10 units remaining from the January 15 purchase at $12 each. The total ending inventory at this point would be (10 units $10) + (10 units $12) = $100 + $120 = $220. This method creates “LIFO layers,” where the oldest costs remain in inventory. The LIFO conformity rule, outlined in U.S. tax regulations, generally requires companies using LIFO for tax purposes to also use it for financial reporting.