Last-in, first out method (LIFO)

Definition

The Last-In, First-Out (LIFO) method is an inventory valuation approach where the most recently acquired items are assumed to be sold first. This method can impact the financial statements by influencing cost of goods sold and ending inventory.

5 Must Know Facts For Your Next Test

1. LIFO can result in lower taxable income during periods of rising prices because the latest, higher-cost inventory is matched against revenue.
2. In the United States, LIFO is permitted under Generally Accepted Accounting Principles (GAAP) but not allowed under International Financial Reporting Standards (IFRS).
3. LIFO can lead to older inventory costs being reported as assets on the balance sheet, which may not reflect current market conditions.
4. During inflationary times, LIFO will typically produce a higher cost of goods sold and lower ending inventory values compared to other methods like FIFO.
5. A company using LIFO must disclose this method in its financial statements and provide a LIFO reserve if it also uses another inventory costing method for internal purposes.

Review Questions

Related terms

FIFO:

First-In, First-Out (FIFO) is an inventory valuation method where the oldest items are assumed to be sold first.

Weighted Average Cost Method: An inventory valuation technique that calculates a weighted average of all units available for sale during the period.

LIFO Reserve: The difference between inventory reported using LIFO and FIFO methods, often disclosed in financial statements.