of inventory valuation
based on the assumption
that the goods
purchased most recently (the last
in) are sold or used first (the first out). The remaining items are assumed to have been purchased at successively-earlier periods. In this method, value
of the inventory at the end of an accounting period
is based on the value of items purchased earliest. During periods of high inflation
rates, the LIFO method yields lower value of the ending inventory
, higher cost
of goods sold, and a lower gross profit
(hence lower taxable income) than that yielded by the application of the first-in, first-out (FIFO) method.
During prolonged inflationary periods, however, LIFO method can seriously understate the value of inventory because the cost of replacing it would be much higher than the value shown in accounts
. The 'Out' office-basket is an illustration of LIFO method.