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. Investing

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

    We explain why Last-In-First-Out is banned under IFRS
  2. Investing

    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.
  3. Investing

    Financial Statements: Working Capital

    By David Harper (Contact David)A recurring theme in this series is the importance of investors shaping their analytical focus according to companies' business models. Especially when time is ...
  4. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  5. Markets

    Build Your Small Business During Downswings

    Here we offer some cost-saving measures to strengthen your business even when the market is weak.
  6. Markets

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  7. Markets

    International Financial Reporting Standards

    Learn about the purpose of the IFRS, as well as its benefits, goals and fundamental difference from the U.S. GAAP.
  8. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  9. Markets

    Some Key Differences Between IFRS and GAAP

    The International Financial Reporting Standards and the U.S. Generally Accepted Accounting Principles have some key differences.
  10. Investing

    EVA: Calculating NOPAT

    By David Harper, (Contributing Editor - Investopedia Advisor) Contact David In finding economic profit, the essential step is to calculate net operating profit after taxes (NOPAT), and this ...
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. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center