For bookkeeping purposes, the difference between the first in, first out (FIFO) and last in, first out (LIFO) costs of inventory is measured as the LIFO reserve. The distinction between LIFO, also known as the Allowance to Reduce Inventory to LIFO, and the inventory method utilized for internal reporting purposes. annually adjusted.
There are two accounting techniques known as FIFO and LIFO that are used to manage inventory and financial concerns regarding the amount of money a corporation must have locked up in inventory of finished goods, raw materials, parts, components, or feedstocks.
When you account for your inventory using the "last in, first out" approach, you report smaller earnings than if you used the "first in, first out" method, often known as FIFO. This is the main reason why businesses prefer to utilize a LIFO inventory method.
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