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LIFO Reserve Calculation


The following read is about Lifo reserve calculation:
U.S. GAAP require all companies that use LIFO to also report a LIFO reserve, which is the difference between what ending inventory would have been under FIFO accounting and its value under LIFO. If you add the LIFO reserve to the LIFO inventory, you will get the FIFO inventory.
An alternative expression is:
LIFO reserve = FIFO inventory – LIFO inventory
The LIFO reserve is typically shown in the footnotes to the financial statements.
To convert LIFO inventory balances to a FIFO basis, simply add the LIFO reserve to the LIFO inventory:
InvF =InvL + LIFO reserve
To convert COGS from LIFO co FIFO use the formula:
COGSFIFO = COGSLIFO- change in the LIFO reserve
Remember that during a period of rising prices COGS FIFO is too low (below replacement costs). Also, the LIFO reserve is increasing when prices are rising. This increase in the LIFO reserve is exactly the difference between COG LIFO and COGS FIFO. During a period of falling prices we would still subtract the change in the
LIFO reserve from COGS LIFO to get COGS FIFO but the change is a negative number and COGS FIFO will be the larger of the two measures.
Example: Converting from UFO to FIFO
Sipowitz Company, which uses LIFO, reported end-of-year inventory balances of $500 in2005 and $700 in 2006: The LIFO reserve was $200 for 2005 and $300for 2006. COGS during 2006 was $3,000. Convert 2006 ending inventory and COGS to a FIFO basis.
InvF = InvL + LIFO reserve = $700 + $300 =$1,000
COGSF = COGSL – (LIFO reserveE – LIFO reserveB)

=$3,000 – ($300-$200) = $2,900
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