LIFO is an inventory cost-flow assumption that assigns the most recent costs to cost of goods sold before older inventory costs.
LIFO, short for last in, first out, is an inventory accounting method that assumes the newest inventory costs are recognized in cost of goods sold before older costs.
That means older layers of inventory cost can remain in ending inventory for long periods. In inflationary conditions, LIFO often produces higher cost of goods sold and lower reported profit than FIFO.
LIFO changes:
It therefore affects both reported performance and balance-sheet valuation.
LIFO is mainly discussed in the context of inventory accounting and financial reporting standards. It is often contrasted with FIFO, AVCO, and Specific Identification.
When older cost layers remain in inventory, users also pay attention to disclosures such as the LIFO Reserve, which helps compare LIFO results with non-LIFO reporting.