Pegasus2008

What is the Lifo reserve?

Well let us assume rising inventory costs for explanation purposes.
Lifo reserve is basicly the amount that was expensed that would have been expensed had you been using FIFO. Agree?

Well guess what, the fact that you had indeed incurred that expese saved you tax, so to reverse it you gota account for that.

So say your lifo reserve is $100, meens overall you oncured $100 cost you would not have incurred under fifo. You are tempted to simply add that to equity, but wait.

If you remove that cost from your income statemnt, your taxes are gona go up. By how much? by 100*tax

so in esense, rather than gain the 100, you only gained 100*(1-t) by going from Lifo to Fifo...