LIFO Reserve

DEFINITION of 'LIFO Reserve'

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.

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