Lifo reserve is the difference between accounting cost of inventory calculated using the fifo method and the one calculated using the lifo method during inflation (period of rising prices), the fifo inventory cost is higher than the lifo inventory cost. Fifo methods of calculating inventory cost as inventory is usually purchased at different rates (or manufactured at different costs) over an accounting period, there is a need to determine what cost needs to be assigned to inventory.
First in, first out, or fifo, and last in, first out, or lifo, are two common methods of inventory valuation among businesses the system you choose can have profound effects on your taxes, income, logistics and profitability.
First-in, first-out (fifo): under fifo, it's assumed that the inventory that is the oldest is being sold first the fifo method is the standard inventory method for most companies last-in, first-out (lifo): lifo is a newer inventory cost valuation technique (accepted in the 1930s), which assumes that the newest inventory is sold first. Fifo and lifo accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feed stocks they are used to manage assumptions of cost sheet related to inventory, stock repurchases, and various other accounting purposes.
Last in, first out - lifo what is 'last in, first out - lifo' last in, first out (lifo) is a method used to account for inventory, where the most recently produced items are recorded as sold first.
Lifo isn't a good indicator of ending inventory value because the leftover inventory might be extremely old and, perhaps, obsolete this results in a valuation much lower than today's prices lifo results in lower net income because cost of goods sold is higher average cost produces results that fall somewhere between fifo and lifo.
Lifo (last-in-first-out) and fifo (first-in-first-out) are the two most common inventory accounting methods the method of inventory accounting a small business chooses can directly impact its balance sheet , income statement , and statement of cash flows.