What is LIFO?
Last in, first-out (LIFO) is the abbreviation meaning last in, first out. It means that the cost of the inventory will be equal to the cost of the most recent inventory added to the stock whenever it is recorded as sold. The most effective techniques for valuing inventory are FIFO and LIFO.
Advantages Of LIFO
- The tax benefit of the LIFO inventory valuation technique is one of the main reasons for its popularity. When LIFO is utilized during inflationary periods, current purchases at higher prices are matched against receipts, reducing profit overstatement and hence the income tax obligation. The company’s cash flow improves as a result of the reduced income tax.
- In some cases, the physical inventory flow correlates to the LIFO cost flow.
- A company’s net income is less likely to be affected by future price declines if it utilizes LIFO. Companies that employ the LIFO approach often do not have a lot of inventory at current higher pricing since the most recent inventory acquired at a higher price is sold first. As a result, with LIFO, the likelihood of future write-downs to the market owing to lower inventory prices is reduced or even eliminated.