Hi all, I’m having the hardest time conceptually visualizing how a LIFO liquidation causes the LIFO reserve to decrease. Any help would be greatly appreciated. Thanks everyone!
To add more explanation of my failure to grasp the concept, I’ll walk you through my thought process (and please correct me if any of the parts that are wrong): The LIFO Reserve is equal to the excess of FIFO Inventory over LIFO Inventory (FIFO INV - LIFO INV). Got it. Now, in a LIFO liquidation, the amount of goods sold exceed the amount of goods replaced. You’re including older (lower) cost goods into COGS. Now here’s where I get confused. Doesn’t this mean you now have less inventory causing, LIFO INV to go lower and the LIFO reserve to increase?
Let’s try some numbers:
You have 100 units in inventory.
Under LIFO, those units have a cost of $20 each, or $2,000 in inventory.
Under FIFO, those units have a cost of $50 each, or $5,000 in inventory.
Your LIFO reserve is $5,000 – $2,000 = $3,000.
You buy 50 units at $60 each, spending $3,000; you have 150 units in inventory.
Your LIFO inventory is now $2,000 + $3,000 = $5,000.
Your FIFO inventory is now $5,000 + $3,000 = $8,000.
You sell 100 units, leaving 50 units in inventory.
Under LIFO, those units have a cost of $20 each, or $1,000 in inventory.
Under FIFO those units have a cost of $60 each, or $3,000 in inventory.
Your LIFO reserve is now $3,000 – $1,000 = $2,000.
Voilà!
Ahhh perfect! Thanks a bunch s2000. I think i was getting hung up on the term “LIFO Liquidation” when I should have realized that inventory is decreasing (regardless of the classification).
Thanks a bunch 
My pleasure.
Many do. Glad to help you past that.
You’re quite welcome.