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costs of antecedent purchases to ending inventory is not
eliminated, however; it is simply deferred until, in time, there
is a liquidation of the items to which those lower costs have
been allocated. See id. at 7-5. The term “LIFO reserve” refers
to the amount by which the FIFO value (e.g., the current
replacement cost) of inventory exceeds the LIFO value shown in
the accounting records of the taxpayer. See id. par. 7.03[2], at
7-15.6 It is a measure of the potential gain in a store of
inventoried items on account of the use of the LIFO method.
There is more than one method for computing the value of a
LIFO inventory. Id. par. 7.04[1], at 7-30. Nevertheless, all
LIFO computational methods involve essentially three
determinations: (1) The LIFO inventory must be segmented into
groups or “pools” of similar items; (2) a determination must be
6 In the example supra note 4, assuming LIFO, the LIFO
reserve at the end of the year would be $0.64, calculated as
follows:
FIFO value (current replacement cost)
of ending inventory:
2 units at $1.04 = $2.08
10 units at $1.06 = 10.60
$12.68
LIFO value of ending inventory:
10 units at $1.00 = $10.00
2 units at $1.02 = 2.04
12.04
Difference (LIFO reserve): 0.64
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Last modified: May 25, 2011