bingbingliang

Another way to think of it is LIFO reserve is the amount that your inventory would be revalued at if you switched to FIFO. (use $100 like the above example and tax of 30%). Your inventory would increase by 100 (an asset increase).

This throws A=L+OE out of balance and you have to adjust your cash by the amount of taxes you would have paid using FIFO which is (100*.3). To fully balances you would then have to add this net adjustment to retained earnings under equity on the other side of the equation to balance which is:

100 (to inventory) - 100*(.30) (out of cash) = 100*(.7) or 100(1-t)