Lesson: The LIFO Reserve Concept

In this lesson, delve into the intricacies of the LIFO reserve, a crucial accounting measure used for inventory costing. Nick Palazzolo, CPA, breaks down the differences between the LIFO (Last In, First Out) and FIFO (First In, First Out) cost flow assumptions and why companies use the LIFO reserve to reconcile these disparities. By providing a straightforward explanation of the FIFO-LIFO comparison, and the purpose of maintaining a LIFO reserve on financial statements, this lesson demystifies the process of adjusting inventory costs and the importance of this reserve in creating comparable financial information across companies with different inventory accounting methods. Furthermore, Nick examines a practical example to illustrate how a company reports inventory balances under both LIFO and FIFO, and how to adjust inventory to LIFO basis in the financial records.