“Last In First Out(LIFO)”

Introduction to Last In First Out (LIFO)

Last In First Out (LIFO) is an inventory accounting method that records items purchased or produced last as the first to be sold, used, or issued when calculating the cost of goods sold. LIFO accounting records the most recent costs associated with a company’s inventory. It is one of two methods used for calculating the cost of inventory, the other being First In First Out (FIFO).

Understanding LIFO

In LIFO, the inventory items that are most recently purchased or produced are recorded first when calculating the cost of goods sold. This process means that the most current cost associated with a company’s inventory is what is being recorded. This record-keeping method typically results in a lower cost of goods sold and a higher taxable income.

Advantages and Disadvantages of LIFO

As with any accounting practice, there are advantages and disadvantages to using the LIFO method. The main advantages are that it is an easy record-keeping process, and it can result in lower taxes for a company. The disadvantage is that it does not accounted for inflation, meaning that it does not always reflect the true cost of inventory.

FAQs

What is the Last In First Out (LIFO) Method?

The Last In First Out (LIFO) method is an inventory accounting method that records items purchased or produced last as the first to be sold, used, or issued when calculating the cost of goods sold. LIFO accounting records the most recent costs associated with a company’s inventory.

What is FIFO and LIFO Example?

FIFO stands for First In First Out and is the opposite of LIFO. In FIFO, the inventory items that are most recently purchased or produced are recorded last when calculating the cost of goods sold. An example of FIFO would be if a company purchased 100 widgets at $10 each and then purchased 100 more at $15. If they sold 75 of these widgets, the cost of goods sold according to FIFO would be $750 (the cost of the first 100 widgets they purchased).

When Should a Company Use Last in, First Out (LIFO)?

Companies typically use LIFO when an inventory has large price jumps between sales or purchases. This method can help decrease a company’s taxable income and simplify record-keeping. Companies should be aware of the downsides of LIFO, as it does not always reflect the real cost of inventory.