A LIFO reserve is an allowance that is created when a company reports inventory on its balance sheet using the last-in, first-out (LIFO) method. The LIFO reserve is the difference between the LIFO value of inventory and the cost of the same inventory using another valuation method, such as the first-in, first-out (FIFO) method.
The LIFO reserve is reported on the balance sheet as a reduction of the inventory asset. The size of the LIFO reserve can fluctuate from period to period, depending on changes in the cost of inventory and the mix of inventory items.
When a company reports inventory using the LIFO method, it records the most recent purchases of inventory first, regardless of when the inventory was actually purchased. This results in an inventory value that is typically lower than the cost of the same inventory using the FIFO method, because the most recent purchases are typically the most expensive.
The LIFO reserve is the difference between the LIFO value of inventory and the cost of the same inventory using another valuation method, such as the FIFO method. The LIFO reserve is reported on the balance sheet as a reduction of the inventory asset. The size of the LIFO reserve can fluctuate from period to period, depending on changes in the cost of inventory and the mix of inventory items.
What does LIFO stand for?
LIFO stands for "last in, first out". This is a method of inventory valuation in which the most recent items added to inventory are assumed to be the first items sold. This method is often used in businesses with perishable goods, where the most recent items added to inventory are more likely to be sold first. Where is LIFO reserve reported? LIFO reserve is reported in the balance sheet as a contra-asset account. Is LIFO adjustment non cash? LIFO adjustment is a non-cash item.
What is FIFO & FEFO?
In accounting, FIFO and FEFO are methods used to assign costs to inventory. FIFO stands for "first in, first out," and FEFO stands for "first expiration, first out."
With the FIFO method, the costs of the inventory that is sold are first assigned to the oldest inventory, regardless of when it was actually sold. So, if a company has 100 units of inventory that were purchased at different times and prices, and sells 50 units, the cost of the inventory sold would be based on the cost of the first 50 units purchased.
With the FEFO method, the costs of the inventory that is sold are first assigned to the inventory that will expire first, regardless of when it was actually purchased. So, if a company has 100 units of inventory that were purchased at different times and prices, and sells 50 units, the cost of the inventory sold would be based on the cost of the first 50 units to expire. How do you account for LIFO reserve? LIFO reserve is the amount by which the LIFO value of inventory exceeds the cost of inventory using another costing method, such as FIFO. LIFO reserve is reported as a separate line item on the balance sheet.