Economics: Inventory Method: LIFO

LIFO

LIFO is the opposite of the FIFO inventory costing method in that it means last in, first out. The last units purchased or put into inventory are assumed to be the first units sold. Ending inventory under the LIFO method consists of the beginning inventory and earliest purchases during the period. The cost of goods sold, under LIFO, consists of the most recent or last units purchased or put into inventory.

downside to LIFO

The downside to LIFO is the company reports lower net profit and results in a lower ending merchandise inventory.

The LIFO method leaves the __________ in __________.

oldest costs, ending inventory

Under the LIFO inventory method

when inventory costs are rising, the cost of goods sold will be the highest while gross profit is the lowest. This higher cost of goods sold produces lower profits, which decrease taxable income. This is an advantage for companies using the LIFO method as they pay lower income taxes when inventory costs are rising. Lower tax obligations improve and conserve cash and are the primary LIFO benefit. The downside to LIFO is the company reports lower net profit and results in a lower ending merchandise inventory.