What are the differences between the two? Why do we use the latter when coverting from FIFO after tax to LIFO after tax profit?
The LIFO reserve is the cumulative difference between FIFO inventory and LIFO inventory since the company began using LIFO. The change in the LIFO reserve is the contribution to that cumulative difference this year; i.e., it’s the difference between this year’s LIFO reserve and last year’s LIFO reserve.
The change in the LIFO reserve is also, not coincidentally, the difference between this year’s COGS under LIFO and this year’s COGS under FIFO.
We use the change in the LIFO reserve to adjust this year’s income statement because it is the portion that applies to this year, not the cumulative difference since time immemorial.