# LIFO Reserve

This brings me back to when I wrote Level I…can anyone explain why (assuming firm uses LIFO method and invesntory prices are increasing): 1) when units purchased > units sold, LIFO reserve may increase? I read this in CFAI text. 2) a decrease in the LIFO reserve may be indicative of a LIFO liquidation LIFEO Res = FIFO inv - LIFO inv for #1, if prices are rising and we purchase more units (add LIFO layer), I would expect the carry value of inventory to reflect newer higher prices, and thus increase . This would increase LIFO inv in the above equation and lower LIFO res. for #2 If we liquidate old LIFO layers, we are lowering reducing our overall inventory level which still only reflects older, lower priced items. I would expect this to leave the LIFO inv constant or even decrease it which would increase LIFO res in the above equation. Thanks guys

1. If you are not selling your old inventory and adding more inventory to it, then the carrying value of your inventory goes up (increase LIFO reserve) by an additional amount compared to FIFO due to the difference between LIFO and FIFO getting larger as the amount of inventory goes up. 2) selling your older, cheaper inventory is LIFO liquidation. Without going through your equations line by line, I can suggest that you think about it conceptually instead of mathematically. Why would piling up inventory decrease the amount of inventory you had on hand?
1. If we purchase more units FIFOInv will increase more compared to LIFOInv since prices are rising and under FIFO, inventory is consisted of the newer (higher price) units. Thus, LIFO reserve will increase…

Re: LIFO Reserve new Posted by: perimel (IP Logged) Date: January 18, 2011 03:08AM 1) If we purchase more units FIFOInv will increase more compared to LIFOInv since prices are rising and under FIFO, inventory is consisted of the newer (higher price) units. Thus, LIFO reserve will increase… ---------------------------------------------------- That makes sense, Thanks a lot!