Last in, First out (LIFO)?

Last in, First out (LIFO) is an Inventory valuation method where the most recently acquired items are the first to be sold or used. This approach assumes that the latest Inventory costs are the ones that flow out first, which can affect financial statements and tax calculations.

For example, if a company has the following Inventory purchases:

• 100 units at $10 each
• 100 units at $12 each
• 100 units at $15 each

If the company sells 150 units, under LIFO, the Cost of Goods Sold would be calculated as:

• 100 units at $15 = $1,500
• 50 units at $12 = $600

This results in a total Cost of Goods Sold of $2,100.

In a case where prices are rising, using LIFO can lead to lower Taxable Income because the higher costs of the most recent Inventory are matched against Revenues. Conversely, in times of falling prices, LIFO may result in higher Taxable Income.