In this episode of What’s New at CFI, Ryan is joined by Jeff Schmidt to introduce CFI’s latest course, Accounting for Inventory. They discuss the importance of inventory accounting across industries, covering key methods such as Weighted Average, FIFO (First In, First Out), and LIFO (Last In, First Out).

Jeff explains how different inventory accounting choices impact financial statements, profitability, and tax obligations—especially for U.S. companies under GAAP versus those following IFRS. The course dives into critical skills for financial analysts, including understanding LIFO disclosures and adjusting financial statements for global comparisons.

Whether you’re new to inventory accounting or refining your expertise, this course provides essential knowledge to navigate complex financial reporting. Watch now to learn more!

Transcript

Ryan (00:13)
Hello and welcome to this episode of What’s New at CFI. My name’s Ryan Spendelow and I’m SVP of Training and Curriculum here at CFI. Today I’m really delighted to be joined by my fellow subject matter expert, Jeff Schmidt. So good morning Jeff, how are you?

Jeff Schmidt (00:32)
Good morning. I’m great. How are you?

Ryan (00:35)
I’m doing really, really well. We’ve got a really exciting and a really important course to cover in this week’s episode of What’s New at CFI. And today we’re looking at a course called Accounting for Inventory, I believe. So I’ve got a couple of questions for you, Jeff, because you are the expert in all things accounting. Can you just explain to us what is inventory and is accounting for inventory important for all types of industries?

Jeff Schmidt (01:04)
Sure, let me tackle the first question. Inventory is just a product that’s held on the balance sheet and it’s for sale in the ordinary course of a company’s business. So it’s usually a current asset, but not always. Sometimes it could be a long -term asset, for example, when you build an airplane, it takes a long time, it takes over a year to build an airplane. So it’s usually a current asset, but

always there are some industries where it’s not. Inventory isn’t is applicable across most industries but not all of them. For instance, banks don’t really hold inventory. That’s not what they’re designed to do. Or any type of company that provides a service instead of a good. So a consulting firm doesn’t have inventory. Those are examples where inventory doesn’t really matter.

But for most other industries and companies, inventory is usually a significant part of the business.

Ryan (02:11)
That’s a really, really interesting observation about where we might find it on the balance sheet because in my rudimentary accounting knowledge, I would have just automatically assumed that all inventory is classified as a current asset. That’s a really good point that you make about sometimes being classified as a long -term asset. I know that there are different inventory methods and I always get confused because this is where some acronyms come

So, what inventory methods do we actually cover on this new course?

Jeff Schmidt (02:43)
So we cover four, really only cover three in detail, but we talk about the specific identification method, which is used for car dealerships, maybe house manufacturers, where you can easily and specifically identify the cost of the car. say, okay, that’s the Honda, here’s the ID number, $13,000 in inventory, or whatever it is, where it’s fairly

to track inventory. We don’t cover that much. Again, we talk about it, but we really focus on three different ways to measure inventory. So there’s the weighted average method. There is the FIFO, or first in, first out. And then there’s LIFO, which is last in, first out.

And these weighted average, FIFO and LIFO are all assumptions about how inventory flows in and out of the company. And that’s very, very crucial. They are assumptions. And they might not actually match the way inventory actually flows through the company.

So first in, first out, you have the oldest inventory being sold first. First in, first out. With last in, first out, you have the most recent inventory being sold first.

And depending on which method a company chooses, even if they’re identical, identical companies, if one company chooses FIFO for inventory and another company chooses LIFO, their financial statements are going to be quite different. They’re gonna be different in cost of goods sold, different net income. They’re gonna be different on the balance sheet. They’re gonna have different inventory values, different retained earnings. And the cash flow is actually gonna be different as well, focus on those three, especially comparing FIFO to LIFO.

Ryan (04:41)
Yeah, so it really does have quite a material or potentially accounting for inventory, potentially has a really material effect on what those financial statements end up looking like and I guess the overall profitability of a business. I guess that’s really, really important for any kind of financial analyst to understand that. And those are those acronyms that I always remember with accounting for inventory, LIFO and FIFO.

Jeff Schmidt (04:58)
Yep. Yep.

Ryan (05:09)
What are the things that actually make LIFO and FIFO inventory accounting challenging or difficult for financial analysts?

Jeff Schmidt (05:17)
Sure, let’s start with the good news. The good news is that LIFO is not allowed for companies that use International Financial Reporting Standards or IFRS. That’s an accounting body that basically the rest of the world uses other than the US. And the US uses Generally Accepted Accounting Principles or US GAAP. And US GAAP is the only one that allows LIFO for financial reporting. So…

That’s the good news. The bad news is though, if you’re analyzing US companies, even if you’re comparing a company in the UK and you want to compare it to a company in the US, you have to think about does this US company use LIFO? And so there’s a little bit more good news in the sense that…

Because LIFO costs generally rise over time and so if you use LIFO that means your cost of goods sold is generally going to be higher than FIFO. So higher cost means lower taxes. So one of the reasons why companies do use LIFO even though they have to do a lot of extra accounting for it is that it actually results in a cash tax savings.

The trick, though, is if a company does use LIFO for tax purposes, there’s what’s known as the LIFO conformity rule, which we get into in the course, which means the company has to also use LIFO for when it reports in its annual report, or it’s 10K. And so it can get a little tricky, but,

basically, any company that uses LIFO has to provide enough disclosures so that an analyst or stakeholder can convert LIFO cost of goods sold and LIFO inventory on the balance sheet to a FIFO basis.

So again, there’s enough disclosure so that if you do want to compare, again, company in the UK or Canada or wherever, France, anywhere in the world with US, that US uses LiFO, they do give you enough information so that you can convert it to FIFO. And then again, in IFRS, most companies use FIFO so that it’s more apples to apples. So that’s really the trick there.

Ryan (07:41)
Okay. Yeah, that makes sense. So it sounds like there’s quite a lot of really important accounting skill acquisition in doing this accounting for inventory course and why this is so important for all financial analysts. So, Jeff, I’m really looking forward to taking this accounting for inventory course myself.

And I guess it’s part of a number of new accounting courses that CFI are releasing over the second half of this year. Jeff, thanks ever so much for coming on the What’s New at CFI podcast this week. I hope you enjoyed the rest of your day and I can’t wait to have you back on a future episode.

Jeff Schmidt (08:14)
Yep. Thank you.

Sounds great.

Ryan (08:26)
Awesome.

All right, everybody. Hey, thanks very much for listening to this week’s episode of What’s New at CFI, where we’ve delved into the world of accounting for inventory. Hope to see you again in another podcast very soon. Take care. Bye.