To make a proper estimation of Xtractor’s cost of sales, the amount of decrease of the LIFO reserve needs to be added to the cost of sales. Further, since the company has been reporting a cost of sales lower than the actual replacement cost, due to price decreases, the company’s cost of sales has been underestimated. Since the prices of inventory have been decreasing, the LIFO reserve must have been decreasing as well. Subtract the amount of decrease of the LIFO reserve from the cost of goods sold.

Add the amount of decrease of the LIFO reserve to the cost of goods sold.

Add the amount of increase of the LIFO reserve to the cost of goods sold.

To compare the gross profit of Xtractor with other companies reporting using FIFO, an analyst would need to: The price of production inputs within the company’s industry has been decreasing for the last few years. The inventory amount will have to be adjusted by adding the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet.

Subtract the disclosed LIFO reserve from the inventory balance.

Multiply the inventory balance by the disclosed LIFO reserve.

There is also an additional inventory purchased during the 2020-2021 fiscal year amounting to 2,0 ending inventory recorded at the fiscal year ended 2021.

Add the disclosed LIFO reserve to the inventory balance. The beginning inventory recorded for the fiscal year ended in 2020 is 3,000.

If a company uses the LIFO method, in converting the reported inventory amount to FIFO, the company has to: If the LIFO reserve decreases during a reporting period, the decrease in the reserve should be added to the cost of the sales amount which is reported on the income statement. The cost of sales figure should also be adjusted by subtracting the increase in the LIFO reserve during the period from the cost of sales amount reported on the income statement. To compare companies that use the LIFO method with other companies, the inventory amount has to be adjusted by adding the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet.

Conversion of Reported Financial Statements from LIFO to FIFO For example, the LIFO reserve disclosure enables adjustments to be made to the financial statements of a US company that uses the LIFO method, thereby making it comparable to a similar company that uses the FIFO method. The use of the LIFO reserve makes this possible. The amount by which the inventory item was written down is recorded under cost of goods sold on the balance sheet.It is oftentimes necessary to compare the financial statements of companies that use LIFO to those of their counterparts that use FIFO. This value may be reduced to market value, which is defined as the middle value when comparing the cost to replace the inventory, the difference between the net realizable value and the typical profit on the item, and the net realizable value of the item. The lower of cost or market (LCM) method lets companies record losses by writing down the value of the affected inventory items. Why Is the Lower of Cost or Market (LCM) Method Used?

The LCM method is a tenet of generally accepted accounting principles (GAAP).Under this scenario, if the price at which the inventory may be sold dips below the net realizable value (NRV) of the item, which consequently results in a loss, then the LCM method can be employed to record the loss. The LCM method takes into account that the value of a good can fluctuate.Historical cost refers to the cost of inventory at the time it was originally purchased.The lower of cost or market (LCM) method relies on the fact that when investors value a company’s inventory, those assets shall be recorded on the balance sheet at either the market value or the historical cost.

Lifo inventory turnover formula