Inventory cost-flow assumption that assigns the newest recorded costs to units sold first.
LIFO, short for last in, first out, is an inventory cost-flow assumption that assigns the newest recorded costs to units sold first. It changes how cost of goods sold and ending inventory are measured.
In periods of rising prices, LIFO often produces higher cost of goods sold and lower ending inventory than FIFO because the most recent, higher costs move into expense first. That can materially affect gross profit, taxes, and comparability.
LIFO is an accounting convention, not necessarily a statement about the physical movement of inventory. It is mainly important because it changes reported costs and because it is not permitted under every reporting framework.
Readers often look at LIFO disclosures closely because the method can make margin comparisons less straightforward when peer companies use FIFO or weighted-average approaches instead.
A business buys:
| Purchase Layer | Units | Unit Cost |
|---|---|---|
| First purchase | 100 | 10 |
| Second purchase | 100 | 12 |
Then it sells 120 units. Under LIFO, cost of goods sold is:
| Cost Layer Used | Amount |
|---|---|
| 100 x 12 | 1,200 |
| 20 x 10 | 200 |
| COGS | 1,400 |
Ending inventory is the remaining 80 units at 10, or 800.
LIFO is not allowed under IFRS, so it should not be treated as a universal inventory method. It also does not mean the newest physical items literally left the warehouse first.