When reported in financial statements, a lifo allowance account usually:
1. is shown in the firm's income statement.
2. is added to lifo cost to indicate what the inventory would cost on a fifo basis.
3. indicates the effect on income if lifo were not used.
4. shows the current rate of inflation for that asset.

2

Explanation: The LIFO is known as last in and first out. It is when the last purchased inventory is sold first.

The LIFO allowance account is derived by subtracting LIFO inventory carrying amount from what the inventory would have been under THE FIFO inventory system.

Therefore, LIFO reserves + LIFO inventory = FIFO inventory system.

FIFO is known as the first in, first out inventory system. It is when the inventory purchased first is disposed of first.

The LIFO allowance account is required to be disclosed by the US GAAP. It is recorded either in the balance sheet or in the notes to the financial statement.

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