Last in, first out (LIFO) and first in, first out (FIFO) are two methods of inventory valuation.
LIFO is when the last produced assets are sold first, and FIFO is when the first produced assets are sold first.
The LIFO reserve is an accounting measure that takes into account the difference between the cost of inventories according to the FIFO method and according to the LIFO method.
The reason for using the LIFO reserve is that most businesses use FIFO for internal use and LIFO for external reporting.
FIFO shows an attractive return for investors, while LIFO reduces taxes due to the specific calculations of each method.