Lifo reserve

The difference between a LIFO and a FIFO inventory valuation, disclosed in the notes so a reader can undo the method before comparing two firms.

Where you will meet it

Lifo reserve appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Contrast cost flow methods for inventory and explain the LIFO reserve
  CFA Level I · Financial Statement Analysis

  “The LIFO reserve, disclosed in the notes, is the difference between the two valuations, and adding it to LIFO inventory converts the balance to a FIFO basis — which is what makes a LIFO reporter comparable with a FIFO one.”

• Assess how good a company's financial figures are and propose adjustments that make them more reliable and comparable with peers, including adjustments for differing accounting standards, methods and assumptions
  CFA Level II · Financial Statement Analysis

  “To compare a US GAAP LIFO company with a FIFO peer, add the LIFO reserve to inventory, add the reserve times one minus the tax rate to equity and the rest to deferred tax, and adjust cost of sales by the change in the reserve.”

Learn it properly

• Inventory methods: FIFO, LIFO and weighted average compared Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with L · Glossary