LIFO
Last In, First Out - an inventory valuation method assuming newest items are sold first.
Under LIFO, COGS reflects the newest and typically higher costs while ending inventory reflects older, lower costs. During inflation, LIFO results in higher COGS, lower reported profits, and lower income taxes. However, LIFO is only permitted under US GAAP, not IFRS, limiting its use internationally.
Example
A hardware store buys hammers at $8 in January and $10 in June—under LIFO, July sales use the $10 cost even though $8 hammers are physically still on the shelf.
Why It Matters for Your Business
LIFO can significantly reduce your tax bill during inflation by reporting higher costs, but it complicates inventory valuation and isn't allowed under international standards.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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