LIFOmenetelmään

LIFO (Last-In, First-Out) is an inventory valuation method used in accounting. Under the LIFO method, the cost of the most recently acquired inventory items are assumed to be the first ones sold. This means that the cost of goods sold (COGS) is based on the prices of the latest purchases, while the remaining inventory on hand is valued at the cost of the older stock.

The primary impact of LIFO is on a company's reported net income and tax liability. In periods of rising prices, LIFO generally results in a higher COGS compared to other methods like FIFO (First-In, First-Out). This higher COGS leads to a lower reported gross profit and, consequently, a lower taxable income, thus potentially reducing the company's tax burden. Conversely, in periods of falling prices, LIFO would result in a lower COGS and higher taxable income.

While LIFO can offer tax advantages in inflationary environments, it can also lead to an understatement of inventory values on the balance sheet, as the oldest inventory costs may be significantly lower than current market values. Furthermore, LIFO is not permitted under International Financial Reporting Standards (IFRS), although it is allowed under U.S. Generally Accepted Accounting Principles (GAAP). The use of LIFO can also lead to inventory profits, which occur when old, low-cost inventory layers are depleted, and the cost of goods sold reflects higher, more recent costs.