Man. You are absolutely genius. I like the conclusion of 10:15. Could you just clarify how income tax provision works? I simply lost it. I'd really appreciate it.
Income Taxes are higher under FIFO because COGS is lower (assuming that Inventory prices rise over time), which means that Pre-Tax Income is higher. The rate is the same, but it's applied to a higher Pre-Tax Income, so Income Taxes are higher.
If inventory prices are rising, probably LIFO because Net Income will be lower, but the Change in Inventory on the CFS will also be less negative since COGS is lower under LIFO while Inventory Purchases stays the same. In the example here, cash flow is down by $40 under FIFO.
Is there an option (here in the US) to use neither- i.e. companies with good tracking systems/ supply chain management software can calculate the COGS for every unit based on the parts/supplies used from the inventory. Does GAAP account for those scenarios?
A company has to pick one and state which one it uses. The issue isn't really tracking, it's that those are the 2 standards and you have to follow one of them... US GAAP allows either one, but IFRS only allows FIFO.
Yes, but this was a simple ~10-minute lesson intended to illustrate the basics. You can always add more - the question is what to take away, not what to add.
q1. Can a company change from FIFO (in one financial year) to LIFO (in next financial year) or vice versa if they want to show higher net income. Or do they have to fix their accounting method and use that particular method for the rest of their life?? q2. Can we use LIFO for perishable products or products that have limited shelf life ???
1) Theoretically, yes, companies can switch, but in reality ~99.9% of companies use the same system from year to year. They tend to switch only when they're very young and not yet public, or when something major like a transformative acquisition happens. 2) Not sure offhand, but LIFO vs. FIFO would probably not even make much of a difference for perishable products.
Yes, the pacing on some of these earlier videos is off. If you look at anything more recent, the speed is more appropriate. You can use browser plugins to adjust the speed if you really want (see: chrome.google.com/webstore/detail/youtube-playback-speed-co/hdannnflhlmdablckfkjpleikpphncik). Unfortunately, TH-cam does not let us replace or update videos, so we cannot fix this issue on older ones without deleting them and losing all the data.
Fantastic explanation. Thank you
Thanks for watching!
Man. You are absolutely genius. I like the conclusion of 10:15. Could you just clarify how income tax provision works? I simply lost it. I'd really appreciate it.
Income Taxes are higher under FIFO because COGS is lower (assuming that Inventory prices rise over time), which means that Pre-Tax Income is higher. The rate is the same, but it's applied to a higher Pre-Tax Income, so Income Taxes are higher.
@@financialmodeling thanks a lot. The matter of making myself sure. Now it's clear :)
awesome !!! easy to understand. Tks alot
Thanks for watching!
oh my god, you are the John Green of accounting!!!
Thanks for watching!
Thank you :)
+Andreas K. Thanks for watching!
Thanks!
Thanks for watching!
I am wondering if company wants to preserve cash, what type of inventory accounting method would you use in a time of increasing prices?
If inventory prices are rising, probably LIFO because Net Income will be lower, but the Change in Inventory on the CFS will also be less negative since COGS is lower under LIFO while Inventory Purchases stays the same. In the example here, cash flow is down by $40 under FIFO.
Great explanation! But I've read that LIFO has higher COGS since it's using recent purchases. Is that correct?
Is there an option (here in the US) to use neither- i.e. companies with good tracking systems/ supply chain management software can calculate the COGS for every unit based on the parts/supplies used from the inventory. Does GAAP account for those scenarios?
A company has to pick one and state which one it uses. The issue isn't really tracking, it's that those are the 2 standards and you have to follow one of them... US GAAP allows either one, but IFRS only allows FIFO.
@@financialmodeling but what about weighted-average? This method seems to be allowed under IFRS/US GAAP...
Would have been useful to talk about LIFO reserve and bridging gap between LIFO and FIFO no?
Yes, but this was a simple ~10-minute lesson intended to illustrate the basics. You can always add more - the question is what to take away, not what to add.
I just wish I were as smooth in Excel as this guy.
You can do it! Just take our Excel course and practice a lot.
q1. Can a company change from FIFO (in one financial year) to LIFO (in next financial year) or vice versa if they want to show higher net income. Or do they have to fix their accounting method and use that particular method for the rest of their life??
q2. Can we use LIFO for perishable products or products that have limited shelf life ???
1) Theoretically, yes, companies can switch, but in reality ~99.9% of companies use the same system from year to year. They tend to switch only when they're very young and not yet public, or when something major like a transformative acquisition happens.
2) Not sure offhand, but LIFO vs. FIFO would probably not even make much of a difference for perishable products.
Dude you blew through this, making it hard to understand. You need to slow down!!!
Yes, the pacing on some of these earlier videos is off. If you look at anything more recent, the speed is more appropriate. You can use browser plugins to adjust the speed if you really want (see: chrome.google.com/webstore/detail/youtube-playback-speed-co/hdannnflhlmdablckfkjpleikpphncik). Unfortunately, TH-cam does not let us replace or update videos, so we cannot fix this issue on older ones without deleting them and losing all the data.