Last in, first out (LIFO) describes a method of accounting that assumes that the most recent items a business acquires are also the first to be disposed of or sold.
First in, first out (FIFO) and last in, first out (LIFO) are two methods businesses use to account for their inventory. The last in, first out (LIFO) method assumes that the products a business has most recently acquired are the first to be sold.
While FIFO is the most commonly used and preferred accounting method, last in, first out (LIFO) holds some tax and cash flow benefits for businesses. Businesses with large inventories tend to use LIFO as an inventory valuation method because it allows them to take advantage of these benefits more effectively.
When inflation occurs, the prices of more recent products are typically higher than existing products. Because of this, the last in, first out (LIFO) often results in lower income and lower cost of goods sold (COGS) — but also lower taxes. In this way, it’s a strategic accounting tool that can help a business save money.