Use to keep track of the difference between methods used for internal purposes and methods used for presentation purposes.įollowing are some of the disadvantages of LIFO Reserve:.Valuation is as per generally accepted accounting principles.Used to adjust the difference in inventory valuation due to other valuation methods.It helps to decrease the profitability to gain.Used to offset the operating losses that occurred to the organization.The following are advantages of LIFO Reserve: Adjust the tax effect if the tax rises higher due to a change in valuation.To offset the difference if a negative occurred during the change in the valuation method.To adjust the valuation effect of the debit balance.LIFO Reserve = Valuation as per FIFO Basis – Valuation as per LIFO Basis The Value of Inventory as per the normal method employed by the organization in accounting, i.e., as per the FIFO method, is $ 38,500, whereas the details of stock are as under:Ĭalculate the valuation as per LIFO Method and also calculate LIFO Reserve. Still, for the purpose of taxation and the financial statement, it wants to adopt the LIFO Method as it reduces the valuation of inventory and increases the cost of goods sold, ultimately resulting in less profit and benefit in taxation. US Company uses the FIFO Method in Accounting. The difference between valuation as per regular method and valuation as per LIFO basis is termed LIFO Reserve. Step 3: Calculate the Difference between valuation as per FIFO basis or valuation as per weighted average basis, i.e., as per the organization’s regular method.With the valuation as per LIFO basis, the value of inventory tends to be lower than FIFO, or weighted average, as raw material prices continuously increase due to various reasons. Another reason includes the tax benefit given by this.
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