LIFO Method
An inventory valuation approach assuming most recently purchased items are sold first, typically increasing cost of goods sold during inflation and reducing taxable income.
LIFO Method
An inventory valuation approach that assumes the most recently purchased or produced items are the first ones sold or used, regardless of actual physical flow, resulting in ending inventory consisting of the oldest acquired items.
For example, if a manufacturer purchases raw materials at $50 per unit in January, $55 in March, and $60 in June, then uses 100 units in July, LIFO would assign the most recent prices ($60) to the goods used, maximizing cost of goods sold and minimizing ending inventory value.
Last-In, First-Out (LIFO) rarely matches physical flow in most businesses but offers tax advantages during inflation by assigning higher, more recent costs to cost of goods sold, reducing taxable income. This creates a “LIFO reserve” representing the difference between LIFO and FIFO inventory valuations. LIFO is permitted under U.S. GAAP but prohibited under IFRS, creating challenges for multinational companies. Industries with rising costs and homogeneous inventories like oil, chemicals, and metals often benefit most from LIFO, though companies using it must also use it for financial reporting if they use it for tax purposes (LIFO conformity rule).