LIFO Reserve

Posted in Finance, Accounting and Economics Terms, Total Reads: 689

Definition: LIFO Reserve

LIFO Reserve is the gap between the LIFO and FIFO costs of inventory. LIFO (Last In, First Out) and FIFO (First In, First Out) are the two types of costs in a company’s inventory can be calculated. Generally, companies use FIFO for its accounting system however they use LIFO for Financial Statements and Income Tax Reporting due to the inflation.

According to the above explanation we can conclude that,

LIFO Reserve = FIFO inventory Costs – LIFO inventory Costs

Now, during Inflation, FIFO inventory value is more than LIFO inventory value, so the credit balance of LIFO Reserve is more. Whereas on the other hand, during Deflation, LIFO inventory value is more than FIFO inventory value, so LIFO reserve reduces.

Hence, we can say that the LIFO reserve can be served as a measure of inflation for that particular year.

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