LIFO
Definition
Last In, First Out: an inventory accounting method where the most recently acquired stock is expensed first. Under inflation it raises cost of goods sold and lowers reported profit and taxes.
In Practice
LIFO is primarily an accounting construct rather than a physical practice: few warehouses deliberately ship the newest stock first. Under LIFO, the latest, usually highest, costs flow to cost of goods sold, which in inflationary times reduces taxable income, while older, cheaper costs remain in ending inventory as LIFO layers.
Planners should know two practical implications. First, LIFO is permitted under US GAAP but prohibited under IFRS, so multinational reporting often requires parallel valuations. Second, drawing inventory down below historical levels triggers LIFO liquidation, releasing old low-cost layers into COGS and creating a one-time profit spike that can distort performance metrics during inventory reduction programs.
Example: a steel service center on LIFO runs a year-end inventory reduction. Selling into decades-old cost layers inflates reported margin by 3 points that quarter, and the planner has to explain to leadership why the improvement will not repeat.
Related Terms
First In, First Out: a rotation and valuation method where the oldest inventory is used or sold first. It keeps stock fresh physically and matches oldest costs to current sales in accounting.
FEFOFirst Expired, First Out: a picking rule that ships the stock with the earliest expiration date first, regardless of when it was received. It is the standard rotation method for perishable and dated goods.
Inventory TurnoverA ratio measuring how many times inventory is sold and replaced over a period, typically a year. It is calculated as cost of goods sold divided by average inventory value.