Last In First Out (Lifo)

Last In First Out (Lifo)

In accounting, Last In First Out (LIFO) is a method used to value inventory. Under the LIFO method, the last items purchased are assumed to be the first items sold. The opposite of LIFO is First In First Out (FIFO).

The LIFO method is used in countries with high inflation rates to minimize taxes. When inflation is high, prices of goods increase. If a company uses the FIFO method, it will be taxed on the profit made on the sale of goods that were purchased at a lower price. However, if the company uses the LIFO method, it will be taxed on the profit made on the sale of goods that were purchased at a higher price. This results in a lower tax liability for the company.

The main disadvantage of the LIFO method is that it does not reflect reality. In most cases, businesses do not sell their products in the order in which they were purchased.