LIFO Reserve: The Link between FIFO and LIFO Inventory Methods

When companies use the LIFO method, their footnotes must disclose what the value of their inventories would be under the FIFO method. The LIFO reserve is used to convert the value of inventories between the two methods, such that:

LIFO Reserve = Inventory (FIFO Basis) – Inventory (LIFO Basis)

Application: When comparing a company that accounts for inventories using LIFO with a company using FIFO, the LIFO reserve must be added to the LIFO company’s inventory levels to arrive at FIFO inventory levels for an apples-to-apples comparison.