LIFO Inventory Accounting Method | Definition | What is it?

LIFO Inventory Accounting

LIFO Inventory Accounting Method

Last-in, First-out. A method of inventory valuation based on the assumption that the last goods purchased are the first goods used or sold. This allows matching current costs with current revenue. However, unless costs remain relatively unchanged, the LIFO method will usually misstate the ending inventory balance for accounting purposes, due to the fact that inventory typically involves costs from earlier periods.

The LIFO method owes its origin to the US Internal Revenue Code, which offers taxpayers with inventories the option of using LIFO in calculating cost of goods sold. Taxpayers who select the LIFO method must adhere to a number of restrictions, including:

(a) Inventory must be valued at cost regardless of its market value.

(b) The same LIFO method must also be used in determining profit/loss for external financial reporting, such as annual reports to shareholders, credit agencies, or the SEC. In other words, the taxpayer must not use a different method of inventory valuation for accounting purposes than for tax purposes.

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