LIFO
Last In, First Out — an inventory accounting method assuming the most recently acquired items are sold first, resulting in higher COGS and lower profits during inflation but tax benefits.
Example
“Under LIFO, companies expense newest (higher cost) inventory first during inflation — reducing taxable income.”
Memory Tip
LIFO = Last In, First Out. Newest inventory sold first. Lower taxes in inflation. Not allowed under IFRS.
Why It Matters
LIFO affects how much income tax you owe and how profitable your business appears on financial statements. During inflationary periods, choosing LIFO can significantly reduce your taxable income and the taxes you must pay, making it a strategically important decision for business owners and investors.
Common Misconception
Many people believe LIFO must match the actual physical flow of inventory, but it is simply an accounting method that does not require items to actually be sold in the order acquired. A company can use LIFO for accounting purposes while physically removing inventory in a completely different order.
In Practice
Imagine a bakery that purchases flour for 100 dollars per bag in January and then 120 dollars per bag in December due to inflation. If they sell 10 bags in December using LIFO, they record the cost as 1200 dollars rather than 1000 dollars, reducing reported profit by 200 dollars and lowering their tax bill accordingly.
Etymology
Acronym for Last In, First Out. The LAST items IN are the FIRST items OUT (sold).
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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