Taxes: Even though you may find that this inventory cost method can lead to a decline in profits for your company, it also allows your company to pay less corporate tax. Inflation: You could use the LIFO method when your costs associated with buying inventory or making products have been growing due to factors like inflation. There are several reasons you might use LIFO in accounting: ![]() Related: What Is the Allowance Method? Definition and Comparison Reasons to use LIFO You can then leave your old inventory costs on your balance sheet and expense the newest inventory costs first. This means that when you calculate the cost of your products, you can evaluate the most recent ones your company added to its inventory and record these as cost of goods sold (COGS). It's an inventory valuation method that speculates that the last items you put into inventory are the first items that sell at the start of an accounting year. In this article, we define LIFO, explain why and when you can use it, discuss how to use it and provide some LIFO examples. Learning about this concept can help you understand why businesses might use this valuation method in their processes. ![]() When reviewing the goods a company sells each accounting year, it can be important to have inventory cost methods that you can use, like the "last-in, first-out" method (LIFO). Finance, accounting and supply chain professionals use a wide variety of terms to describe different aspects of inventory management.
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