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What Is Last in First Out? | Speed Commerce

What Is Last in First Out?

3PL Glossary > Last In First Out (LIFO)

What Is Last in First Out?

Last In, First Out (LIFO) is an inventory accounting method used by businesses to value their inventory for financial reporting and tax purposes. In a LIFO system, the most recently acquired or produced inventory items are considered the first to be sold or used. This means that the cost of goods sold (COGS) is calculated using the cost of the most recently acquired inventory, while the older, lower-cost inventory is deemed to remain in stock. LIFO is the opposite of the First In, First Out (FIFO) method, where the oldest inventory is assumed to be used or sold first.

How Does LIFO Differ From Other Inventory Valuation Methods?

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LIFO is particularly advantageous during periods of rising prices or inflation. When prices increase, using the most recent, higher-cost inventory for calculating COGS results in lower reported profits and, consequently, lower income tax liabilities. This can provide businesses with a tax advantage, as they are taxed on lower profits. However, it's important to note that LIFO may not accurately reflect the actual flow of inventory in some industries, and it may lead to mismatches between reported costs and the physical flow of goods.

While LIFO is accepted under the Generally Accepted Accounting Principles (GAAP) in the United States, it is not allowed under International Financial Reporting Standards (IFRS). Businesses using LIFO in the U.S. need to disclose the LIFO reserve, which represents the difference between the inventory value using LIFO and the value using an alternative method such as FIFO. This disclosure helps users of financial statements understand the impact of the chosen inventory valuation method on the company's financial position.

FAQs

Yes, LIFO is a method of inventory valuation where the most recently acquired or produced items are assumed to be the first ones sold or used. In other words, the last items added to the inventory are considered the first to be removed.

Yes, LIFO can be used for financial reporting purposes under GAAP in the United States. However, it's important to note that it is less common compared to other methods such as FIFO (First In, First Out) due to its impact on financial statements during periods of inflation.

Yes, LIFO typically results in a different cost of goods sold (COGS) and ending inventory valuation compared to FIFO and other methods. In times of rising prices, using LIFO tends to allocate higher costs to COGS, leading to lower reported profits and higher income tax expenses.

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