Accounting Dictionary


LIFO is an inventory method approved by American GAAP, but banned by International IFRS rules. It is a statistical method that assumes that the last item of inventory you purchased is the first one you sell to customers.

In times of inflation the last item is usually the most expensive. This causes LIFO users to report a very low net income and a low balance sheet figure for inventory.

Let’s say I purchased a pair of shoes on June 1 for $10, another on July 1st for $20, and one on September 1st for $40. If I sold a pair of shoes for $40, using LIFO I would assume that I sold the pair I bought in September. $40 in sales -$40 cost of shoes = no profit. My ending inventory would be the two pairs left so my ending inventory would be $10 + $20 for $30.

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