LIFO reserve

Examples of LIFO reserve in the following topics:

• Adjusting for LIFO Reserve

  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • The SEC requires that all registered companies that use LIFO report their LIFO reserves for the start and end of the year.
  • Explain how the LIFO reserve is calculated and how to report it on the financial statements

• The LIFO Reserve

  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • The credit balance in the LIFO reserve reports the difference in the inventory costs under LIFO versus FIFO since the time that LIFO was adopted.
  • The change in the balance in the LIFO reserve will also increase the current year's cost of goods sold.
  • The accounting profession has discouraged the use of the word reserve in financial reporting, so LIFO reserve may sometimes be called: Revaluation to LIFO, Excess of FIFO over LIFO cost, or LIFO allowance.

• Inventory Techniques

  • FIFO, LIFO, and average cost methods are accounting techniques used in managing inventory.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • LIFO is only used in Japan and the United States,
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.

• Impact of Inventory Method on Financial Statement Analysis

  • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
  • The LIFO reserve (an asset or contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions.
  • Dollar Value LIFO is a variation of LIFO.
  • Any increases or decreases in the LIFO reserve are determined based on dollar values rather than quantities.
  • Under LIFO: Ending Inventory is lower, and total current assets are lower; cost of goods sold is higher, and gross profit is lower.

• LIFO Method

  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.
  • LIFO is only used in Japan and the United States.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the "LIFO reserve. " This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • Summarize how using the LIFO method affects a company's financial statements

• Flow of Inventory Costs

  • LIFO is only used in Japan and the United States.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • LIFO (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO (+) Higher value on inventory (-) Lower cost on goods sold

• Inventory Costs

  • Inventory costs depends on methods used, which include Specific Identification, Weighted Average Cost, Moving-Average Cost, FIFO, and LIFO.
  • LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first.
  • LIFO is only used in Japan and the U.S.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.

• FIFO Method

  • FIFO and LIFO methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks.
  • The FIFO method bases its cost flow on the chronological order purchases are made, while the LIFO method bases it cost flow in a reverse chronological order.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the "LIFO reserve. " This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.

• Advantages of LIFO

  • LIFO is only used in Japan and the U.S.
  • LIFO is only used in Japan and the U.S.
  • LIFO: (-) Lower value of inventory (+) Higher cost of goods sold
  • LIFO: (+) Higher value on inventory (-) Lower cost on goods sold
  • Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.

• Disadvantages of LIFO

  • LIFO is facing pressures from international standards boards that may result in its possible complete elimination.
  • LIFO is facing pressures from both the International Reporting Standards Board in cooperation with the SEC and the U.S.
  • IFRS is balance sheet oriented and, on this basis, disallows LIFO as an inventory method.
  • The use of LIFO disrupts the theoretical foundation of the IFRS and if plans proceed as expected, complete phase-out of LIFO will occur in the near future.
  • More importantly is the current tax position on LIFO.