Last In First Out Method (LIFO) Definition

Forex Glossary

Definition

The monetary accounting period last-in, first-out identifies at least one of the acceptable approaches to inventory evaluation. Even the last-in, first-out method presumes the new items stored in inventory would be the first items to be sold once determining the worth of this advantage as it seems about a business ‘s balance sheet.

Explanation

Also known as LIFO, the last-in, first-out method presumes the brand new items stored in stock are the first items to be sold. This is a premise used to appreciate the provider ‘s inventory; the physiological stream of items out of inventory can change using the evaluation technique.

While this process could appear counter intuitive, you will find strong arguments which encourage the LIFO procedure. Proponents of all LIFO genuinely believe that income worth should be dependent on economy expenses. That’s to say, current earnings should be matched with current expenses.

Accurate inventory evaluation will ensure the appropriate coverage of resources to the business ‘s balance sheet. Additionally, it ‘s also vital that you know the end inventory value for a single season is your beginning price worth in the subsequent calendar year. Paychecks mistakes like wise possess a direct impact on earnings. By way of instance, if the start inventory is understated, then net gain in that period is going to be over stated.

Example

The next table exemplifies that the LIFO way of checking stock. Company A begins annually with 250 units, also weighs 400 units through the entire calendar year, also possesses 500 units. The end inventory for Company A is 150 units.

Units Cost per Unit Total Cost
Beginning Inventory 250 $700 $175,000
Additions on March Inch 100 $725 $72,500
Additions on June Inch 100 $750 $75,000
Additions on September Inch 100 $775 $77,500
Additions on December Inch 100 $800 $80,000
Goods Available for Sale 650 $480,000
Units Sold 500
Units from Beginning Inventory 150 $700 $105,000
Ending Inventory 150 $105,000

The aforementioned ending stock of $105,000 may be used along with the price of merchandise available for sale ($480,000) to Establish the Cost of Goods Sold:

= Cost of Goods Available for Sale – Ending Inventory
= 480,000 – $105,000$375,000