LIFO Reserve

What is the 'LIFO Reserve'

The LIFO reserve is the difference between the FIFO and LIFO cost of inventory for accounting purposes. The LIFO reserve is an account used to bridge the gap between FIFO and LIFO costs when a company is using FIFO but would like to report LIFO in its financial statements. The constant increase in cost can create a credit balance in the LIFO reserve, which results in reduced inventory costs when reported on the balance sheet.

BREAKING DOWN 'LIFO Reserve'

In order to ensure accuracy, a LIFO reserve is calculated at the time the LIFO method was adopted. The year-to-year changes in the balance within in the LIFO reserve can also give a rough representation of that particular year's inflation, assuming the type of inventory has not changed. Account professionals have discouraged the use of the word "reserve," therefore causing accountants to use other terms like revaluation to LIFO, excess of FIFO over LIFO cost and LIFO allowance.

RELATED TERMS
  1. LIFO Liquidation

    When a company using the LIFO (Last In, First Out) method of ...
  2. Dollar-Value LIFO

    An accounting method used for inventory that follows the last ...
  3. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets ...
  4. Flow Of Costs

    Refers to the manner in which costs move through a firm. Typically, ...
  5. Lot Relief Method

    A method of computing the cost basis of an asset that is sold ...
  6. First In, Still Here - FISH

    An accounting buzzword that describe when companies still have ...
Related Articles
  1. Professionals

    Converting FIFO to LIFO

    CFA Level 1 - Converting FIFO to LIFO. Learn how to both FIFO and the average-cost method to LIFO. Provides formulas showing how both conversions affects COGS.
  2. Fundamental Analysis

    Why Last In First Out Is Banned Under IFRS (XOM)

    We explain why Last-In-First-Out is banned under IFRS
  3. Fundamental Analysis

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  4. Professionals

    Converting LIFO to FIFO

    CFA Level 1 - Converting LIFO to FIFO. This topic covers various methods of converting LIFO to FIFO. Includes sample calculations for simple and complex conversions.
  5. Professionals

    LIFO and FIFO Valuation of Inventory

    LIFO and FIFO Valuation of Inventory
  6. Professionals

    Causes of Decline in LIFO Reserve

    CFA Level 1 - Causes of Decline in LIFO Reserve. Learn why a company's LIFO reserves might decline. Describes "LIFO liquidation" and its effects on profitability and COGS.
  7. Fundamental Analysis

    Inventory: FIFO, LIFO

    Whether a company chooses FIFO or LIFO has important implications for the bottom line and for tax liability.
  8. Professionals

    Inventory Analysis

    CFA Level 1 - Inventory Analysis. Learn how to calculate ending inventory balances and how unstable price environments cause costing methods to yield different results.
  9. Professionals

    Inventory Valuation and Flow Methods

    Inventory Valuation and Flow Methods
  10. Professionals

    Effects of Misstated Inventory

    CFA Level 1 - Effects of Misstated Inventory. Learn the effects of overstating or understating inventory for each of the four inventory costing methods.
RELATED FAQS
  1. Does US GAAP prefer FIFO or LIFO accounting?

    Investigate the use of LIFO and FIFO inventory accounting methods under U.S. GAAP, and learn why there is pressure from some ... Read Answer >>
  2. What are the business consequences of using FIFO vs. LIFO accounting methods?

    Learn about the real business consequences from using a first-in, first out inventory accounting method versus a last-in, ... Read Answer >>
  3. If during a period of rising prices, a LIFO liquidation occurs ...

    The correct answer is: b) Remember that LIFO transmits the latest prices of inventory over to cost. Therefore, what's left ... Read Answer >>
  4. What's the difference between weighted average accounting and FIFO/LILO accounting ...

    The main difference between weighted average cost accounting, LIFO, and FIFO methods of accounting is the difference in which ... Read Answer >>
  5. What are the disadvantages of the FIFO accounting method?

    Learn how the FIFO accounting method differs from the LIFO method and the primary disadvantages for a company using the FIFO ... Read Answer >>
  6. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles, or GAAP, and International Financial ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center