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The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve (in the example above, it is $750, i.e. $5250 - $4500). This reserve, a form of contra account, is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method. [2]
However, the update does not apply to all companies. Companies that use the FIFO (first-in, first-out) and average-cost methods of inventory valuation are required to implement the changes, whereas companies that use the LIFO (last-in, first-out) and retail inventory methods are not affected by the update. [3]
Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve. Such reserve (an asset or contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions. Such amount may be different for financial reporting and tax purposes in the United States. Dollar Value LIFO.
The order in which an element added to or removed from a stack is described as last in, first out, referred to by the acronym LIFO. [ nb 1 ] As with a stack of physical objects, this structure makes it easy to take an item off the top of the stack, but accessing a datum deeper in the stack may require removing multiple other items first.
LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation.
IAS 2 also requires the use of the First-in, First-out (FIFO) principle whereby those items which have been in stock the longest are considered to be the items that are being used first, ensuring that those items which are held in inventory at the reporting date are valued at the most recent price. As an alternative, costs of inventories may be ...
These methods produce different results because their flow of costs are based upon different assumptions. The FIFO method bases its cost flow on the chronological order in which purchases are made, while the LIFO method bases its cost flow on a reverse chronological order. The average cost method produces a cost flow based on a weighted average ...
FIFO's opposite is LIFO, last-in-first-out, where the youngest entry or "top of the stack" is processed first. [2] A priority queue is neither FIFO or LIFO but may adopt similar behaviour temporarily or by default. Queueing theory encompasses these methods for processing data structures, as well as interactions between strict-FIFO queues.