# LIFO - cost flow method

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Last-in first-out inventory cost flow method - LIFO

LIFO is an inventory cost flow method under which the last acquired items must be resold or used first, as the name implies. In other words, the usage (outflows) of inventory meant to be in the order opposite to its inflows and the ending inventory cost will be computed accordingly to the prices of most latest acquisitions. Usually company uses this method if the expiration date of such products is not an issue and there is no difference which box to use from the very top or bottom of a pile. An entity might want to go with this inventory cost flow method because of convenience or tax purposes. The LIFO gives the highest numbers of cost of goods sold compare to FIFO and weighted average accounting methods.

To illustrate how LIFO works let’s assume that a company just started its business and doesn’t have any inventory at the beginning of a year, but acquired 100 units at \$16 per unit and 200 units at \$22 per unit. They sold 50 of those units after the first purchase and 160 more units after the second purchase during the year.

Under the periodic inventory system (LIFO) where inventory counts should be done at least annually the company will get the following results:

 Date Inventory Items Unit cost Total cost 01/01 Beg. inventory 0 \$0 \$0 02/01 Purchase 100 \$16 \$1,600 03/01 Purchase 200 \$22 \$4,400 Cost of goods available for sale \$6,000 02/01 End. inventory 90 \$16 \$1,440 Cost of goods sold = \$4,560

Under the perpetual inventory system (LIFO) where inventory counts should be done after each sale the company will get the following results:

 Date Inventory Items Unit cost Total cost 01/01 Beg. inventory 0 \$0 \$0 02/01 Purchase 100 \$16 \$1,600 03/01 Purchase 200 \$22 \$4,400 Cost of goods available for sale \$6,000 Date Items bought Items sold Unit cost Total cost 01/01 0 0 \$0 \$0 02/01 100 0 \$16 \$1,600 50 \$16 (\$800) 03/01 200 \$22 \$4,400 160 \$22 (\$3,520) Cost of goods sold = \$4,320 02/01 End. inventory 50 \$16 \$800 03/01 End. inventory 40 \$22 \$880 Total ending inventory \$1,680

Note that under periodic and perpetual inventory systems while using the LIFO method the amount of cost of goods sold are different and the amount of ending inventory are not the same as well. The cost of goods sold and ending inventory are lower under perpetual inventory system compare to periodic one. Therefore, it does matter whether to use periodic or perpetual inventory systems under the LIFO accounting method depending on which system will benefit them the most. For example, periodic calculation typically is easier and faster while perpetual ones are more detailed.