LIFO: What is It?
LIFO (Last-in, First Out) is an inventory valuation method. Traditionally, companies have used FIFO (First-in, First Out) to value their inventory. Under the traditional FIFO method, inventory items acquired first by the company are the first to be deducted as cost of goods sold. LIFO turns this concept on its head, as under the LIFO method, the company considers the most recently acquired inventory items to be sold first. Note that this is solely an accounting concept and has no impact on day-to-day business, but does offer potential tax benefits.
How Can Switching to the LIFO Method Benefit My Company?
Switching to LIFO provides an opportunity for inventory-intensive companies to produce substantial tax savings. LIFO allows a business to deduct the most recently purchased items of inventory which in times of price inflation allows for a greater cost of goods sold deduction than could be realized under the FIFO method.