Question

For a firm that uses the LIFO inventory cost method, the LIFO reserve is: a provision...

For a firm that uses the LIFO inventory cost method, the LIFO reserve is:

a provision for taxes when FIFO is required for tax reporting.

the difference between LIFO cost of sales and FIFO cost of sales.

the difference between LIFO inventory and FIFO inventory.
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Answer #1

The LIFO reserve will calculate the difference between the LIFO and FIFO cost of inventory. When the firm uses FIFO( FIRST IN FIRST OUT) for internal reporting as using the FIFO method for internal reporting results in higher profitability but the LIFO( LAST IN FIRST OUT) for external reporting as this method can help businesses avoid tax due to the higher cost of goods sold reported under this method.

The LIFO reserve discloses this difference between the two inventory valuation methods.

So, the correct option is option c. The difference between the LIFO inventory and the FIFO inventory.

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