The Daily Technical #96: What is the difference between LIFO and FIFO, and what are the implications on net income?

Good morning. Welcome to the 96th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Which of the valuation methodologies is the most variable in terms of output?

The Discounted Cash Flow (DCF) method stands out for its variability.

This variability arises because DCF relies on forward-looking projections and involves discretionary assumptions, making its outputs more susceptible to change.

In contrast, relative valuation approaches, like trading and transaction comparables, are anchored in actual prices paid for similar companies.

While comparables involve some discretion, their valuations deviate less than those from DCF models.

Common Mistakes

1. Failing to explain why DCF outputs vary more. Avoid vague statements by specifying the role of forward-looking projections and discretionary assumptions, which introduce significant variability.

TL;DR

• DCF is the most variable due to forward-looking projections and discretionary assumptions.

• Relative valuations (trading, transaction comps) use actual prices, offering less variability.

• Discretion in comps exists but causes less deviation than DCF outputs.

TODAY’S QUESTION
What is the difference between LIFO and FIFO, and what are the implications on net income?

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