Inventory book value is written down to current market value (replacement cost), reducing inventory and total assets. Inventory write down is reflected as an expenses (part of cost of goods sold) on the income statement, reducing current period gross profit, income, and equity. When a company used lifo, they include in the footnotes of its financial statements that using fifo, their inventories would have been higher; the difference is referred to as the lifo reserve. But using lifo will save on taxes, causing higher cash flow. Lifo companies must report their lifo reserve, so their fifo equivalent is identifiable for comparison purposes. Balance sheet adjustments for a lifo reserve. Increase tax liabilities by the tax rate applied to the lifo reserve. Income statement adjustments for a lifo reserve. To compare financial statements of lifo companies, we must adjust cogs from lifo to fifo by subtracting (or adding) the change in the lifo reserve from the lifo cogs.