The convention that decides which units cost figure moves to COGS when a sale happens: first-in first-out, last-in first-out or weighted average.
Under FIFO the oldest costs hit cost-of-goods-sold first, so in an inflationary period reported profit is higher and inventory on the balance sheet is closer to current prices. LIFO does the reverse, lowering profit and tax while leaving stale costs on the balance sheet.
The choice is disclosed and sticky, but it makes cross-company margin comparisons unreliable when input prices are moving fast. Companies using LIFO disclose a reserve that converts the balance back to a FIFO basis.
Example: with copper costs up 15%, Northwind Tools on FIFO reports COGS of $470M. On LIFO the same units would carry $486M of cost, cutting gross-profit by $16M and the tax bill by roughly $4M.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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