• 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.
  • Company’s LIFO reserve = (FIFO inventory) - (LIFO inventory).
  • The LIFO reserve is tracked so that companies using different accounting methods can be accurately compared.