In short
Last-in, first-out (LIFO) is an inventory cost-flow assumption under which the most recently purchased goods are treated as sold first, so ending inventory consists of the oldest costs.
Key takeaways
- When prices rise, LIFO gives the highest cost of goods sold, the lowest taxable income and the lowest ending inventory.
- The LIFO conformity rule: a company that uses LIFO for US tax must also use it for its financial statements.
- LIFO is not permitted under International Financial Reporting Standards (IFRS).
Example
Beginning inventory of 100 units at $10 and purchases of 200 at $12; 150 units are sold. Periodic LIFO cost of goods sold = 150 × $12 = $1,800.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company uses LIFO for both tax and financial reporting. During a period of rising prices, which of the following is true relative to FIFO?