- If company follows the LIFO method: What the value of ending inventory would be at current (or replacement) cost (this is essentially FIFO cost) Difference between FIFO ending inventory value and LIFO ending inventory value is called the LIFO reserve If a firm "dips" into LIFO layers (see below), company has to disclose the income effect of dipping into LIFO layers Inventory management under LIFO Example XYZ, which buys and sells baseball hats, started its business in 2016. Given below are the purchase and ending inventory data for XYZ from 2016 to 2021. Physical units are in thousands. a) What are the LIFO layers in ending inventory as of December 31,2020? b) How will XYZ disclose the value of its inventory in the footnotes (Dec 31, 2020)? c) It is December 30,2021 . The company has revenues of $50 million from selling 2 million hats in 2021 . The company has no other expenses and the tax rate is 35%. Prepare the income statement for XYZ for the year ended December 31, 2021. d) The tax manager of XYZ proposes that the company buys 200,000 hats on December 30, 2021. Prepare XYZ's income statement for the year ended December 31, 2021 assuming that the company goes ahead with the tax manager's suggestion