what is lifo reserve 
lifo reserve is an accounting term that measures the difference between the first in first out fifo and last in first out lifo cost of inventory for bookkeeping purposes the lifo reserve is an account used to bridge the gap between fifo and lifo costs when a company uses the fifo method to track its inventory but reports under the lifo method in the preparation of its financial statements understanding lifo reservethe fifo method of evaluating inventory is where the goods or services produced first are the goods or services sold first or disposed of first the lifo method of evaluating inventory is when the goods or services produced last are the ones to be sold or disposed of first the lifo reserve comes about because most businesses use the fifo or standard cost method for internal use and the lifo method for external reporting as is the case with tax preparation this is advantageous in periods of rising prices because it reduces a company s tax burden when it reports using the lifo method the lifo reserve is known as a contra inventory account a contra account s balance is the opposite of the account it is associated with lifo vs fifofor example when using the lifo method for inventory accounting in periods of rising prices the cost of reported inventory is higher than the fifo method which therefore increases a company s cost of goods sold cogs decreasing its pre tax earnings when pre tax earnings are lower there is a lower amount to pay taxes on thus fewer taxes paid overall then for internal purposes such as in the case of investor reporting the same company can use the fifo method of inventory accounting which reports lower costs and higher margins which is attractive to investors in periods of rising prices constant increases in costs can create a credit balance in the lifo reserve which results in reduced inventory costs when reported on the balance sheet almost all analysts look at a publicly traded company s lifo reserve often earnings need to be adjusted for changes in the lifo reserve as in adjusted ebitda and some types of adjusted earnings per share eps calculating lifo reserve