LIFO
/ LY-foh /
Picture a coal merchant tipping coal onto a pile in his yard. New coal lands on top, and when a customer comes, he shovels off the top — the most recently delivered coal — first. The stuff at the bottom may sit there for years. LIFO — last-in, first-out — borrows that picture: it assumes the most recently bought goods are the first ones sold.
LIFO is a cost-flow assumption that assigns the cost of your newest purchases to the goods you sell. Take the same widgets: 10 bought at 4, then 10 at 6, and 12 sold. Under LIFO the 12 sold carry the 10 newest (at 6) plus 2 older (at 4) = 60 + 8 = 68 of cost of goods sold, leaving 8 widgets at 4 each (32) in ending inventory. So during rising prices LIFO charges high, recent costs against revenue, producing higher cost of goods sold, lower reported profit, and an ending inventory valued at old, low, sometimes badly outdated costs.
LIFO matters mostly for a practical reason in the United States: by reporting lower profit in inflation, it lowers taxable income and so reduces taxes — which is exactly why some US firms choose it. But it is controversial. International standards (IFRS) ban LIFO entirely, because the balance-sheet inventory can drift wildly below current value, and 'LIFO liquidations' (dipping into ancient cheap layers) can distort profit. So LIFO is essentially a US tax-driven choice, not a globally accepted one.
Same shop, same buys (10 at 4, then 10 at 6) and 12 cans sold. LIFO assumes the newest 10 (at 6) and 2 older (at 4) were sold: cost of goods sold = 60 + 8 = 68. Ending inventory is the 8 oldest cans at 4 = 32 — versus FIFO's 52 and 48 on identical facts.
Same facts, different assumption: LIFO raises cost of goods sold and lowers profit in inflation.
LIFO is permitted under US GAAP but banned under IFRS, so it is not a worldwide method. It typically lowers reported profit (and tax) when prices rise, but can leave balance-sheet inventory absurdly understated.