Last-In, First-Out (LIFO)

What is Last-In, First-Out (LIFO)?

Last-In, First-Out (LIFO) is an inventory valuation method used in accounting. Under the LIFO method, the costs of the most recent inventory purchases are matched against current revenues. Therefore, the items bought last are assumed to be the first ones sold, which affects both inventory value on the balance sheet and cost of goods sold on the income statement.

Short Description: An inventory valuation method where the most recently purchased items are assumed to be sold first.

• Impact on Taxes: By using the latest inventory costs, it may result in higher cost of goods sold and lower taxable income, especially during periods of inflation.
• Financial Position: May not accurately reflect the actual physical flow of goods, potentially showing an outdated inventory on the balance sheet.
• Regulation Limitations: Not allowed under International Financial Reporting Standards (IFRS), but permitted under the Generally Accepted Accounting Principles (GAAP) in the United States.

The LIFO method is often preferred in certain industries for its tax advantages but must be carefully applied due to its complexity and regulatory restrictions.