What is Last In, First Out (LIFO)?
In finance and accounting, last in, first out (LIFO), refers to a common asset-management and valuation technique of inventory at the end of a period.
The method assumes that the newest assets that make their way into inventory are the first ones that are used or sold, whereas older assets are the last ones to be sold.
Essentially this technique is constructed under the basis that an entity will always use or sell its most recent inventory.
Therefore LIFO records the cost of newer inventory as cost of goods sold and adds the cost of older inventory to the ending inventory account.
If a product is sold for less than it is bought for then there is a capital loss. If an asset is sold for a higher amount than it is bought for then there is a capital gain.
LIFO is opposite to the first-in, first-out (FIFO) method.
In the 1970s many American companies switched from using the FIFO to the LIFO method as a means of cutting their income tax expense – particularly during times of inflation.
However, since the International Financial Reporting Standards banned the LIFO method, there has been a recent shift among companies towards the FIFO method again.
The LIFO asset-management and valuation method is only used in the U.S.
The term ‘last in, first out’ is also used when a company has to make a number of workers redundant. In this context, it means that the employees who have been in the company the least time will be the first to go. This is not necessarily the case, because most businesses will base their decisions on how necessary each worker is.
Video – Last In First Out