Meaning – The term LIFO, or last in first out, is a queuing technique in which the next item to be retrieved is the item most recently placed in the queue.
Under LIFO, the cost of the most recent products purchased (or produced) are the first to be expensed as cost of goods sold (COGS), which means the lower cost of older products will be reported as inventory.
Two alternative methods of inventory-costing include first-in, first-out (FIFO), where the oldest inventory items are recorded as sold first, and the average cost method, which takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine COGS and ending inventory.
Example of usage – “Companies that use LIFO inventory valuations are typically those with relatively large inventories, such as retailers or auto dealerships, that can take advantage of lower taxes (when prices are rising) and higher cash flows.”
