LIFO stands for Last-In, First-Out. It's an inventory valuation method where the most recently acquired inventory is recorded as sold first, and the oldest stock remains in inventory. This method is primarily used in cost accounting and financial reporting, especially in environments with fluctuating prices. 

Why Is LIFO Important in Cost Accounting?

The LIFO method is important because it reflects the current cost of inventory in the cost of goods sold (COGS), which can be helpful in assessing true profitability during periods of inflation. It helps companies reduce taxable income by reporting higher COGS, resulting in lower net income and taxes.

Pros and Cons of the LIFO Method

✅ Pros:
  1. Tax advantages: Higher COGS lowers taxable income
  2. Reflects current cost: Useful in inflationary environments
  3. Better income matching: Matches recent costs with current revenues

❌ Cons:

  1. Lower reported income: Can make company look less profitable
  2. Outdated inventory values: Ending inventory may not reflect current market values
  3. Not accepted under IFRS: Only allowed under U.S. GAAP
Understanding LIFO can be easier with a visual walk-through. Watch the full explanation and detailed examples in this video: