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LIFO (Last-In-First-Out): An inventory management method that assumes the last items received are the first items sold.
LIFO, or Last-In-First-Out, is an inventory management method used to value inventory based on the assumption that the last items received are the first items sold. Under LIFO, the cost of goods sold is based on the cost of the most recently acquired inventory, while the cost of the inventory on hand is based on the cost of the oldest inventory.
LIFO is a common method used in accounting to calculate the cost of goods sold and the value of inventory for tax and financial reporting purposes. It is typically used in situations where prices are rising, as it allows businesses to recognize higher costs of goods sold and lower taxable income.
There are several advantages of using LIFO in inventory management:
While LIFO offers several advantages, it also has some disadvantages, including:
Overall, LIFO is an effective inventory management method for businesses that want to reduce their taxable income and improve financial reporting accuracy. However, businesses must be aware of the potential disadvantages of LIFO and carefully evaluate whether it is the most appropriate method for their operations.