- Asset Accounts
- Assets in Accounting
- Total Assets
- Total Assets Formula
- Fixed Assets
- Fully Depreciated Assets
- List of Assets
- Types of Assets
- Examples of Assets
- Net Assets
- Book Value of Asset
- Fixed Assets Accounting
- Net Asset Formula
- Assets Formula
- Net Fixed Assets
- Property Plant and Equipment (PP&E)
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- Inventories List
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- WIP Inventory (Work-in-Progress)
- Raw Material Inventory
- Lower of Cost or Market
- Inventory Write-Down
- Periodic Inventory System
- Ending Inventory Formula
- Average Inventory Formula
- Closing Stock
- Carrying Amount
- Carrying Value
- Inventory vs Stock
- Is Inventory a Current Asset?
- Current Assets
- Short Term Investments on Balance Sheet
- Current Assets vs Non-Current Assets
- Current Assets Examples
- Current Assets List
- Current Assets Formula
- Other Current Assets
- Short Term Assets
- Assets Revaluation
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- LIFO Liquidation
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Is Account Receivable - An Asset or Liability?
- Accounts Receivable Examples
- Accounts Receivable Process
- Is Accounts Receivable an Asset?
- Accounts Receivable - Debit or Credit?
- Accounts Receivables Factoring
- Recourse in Factoring
- Accounts Receivable Financing
- Accounts Receivable Journal Entry
- Net Realizable Value Formula
- Trade Receivables
- Net Realizable Value (NRV)
- Allowance for Doubtful Accounts
- Accrued Revenue
- Accrued Revenue Examples
- Deferred Revenue Expenditure
- Deferred Revenue Examples
- Liquid Assets
- Liquid Assets Examples
- Financial Assets
- Financial Assets Examples
- Financial Assets Types
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Marketable Securities Examples
- Non-Marketable Securities
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Prepaid Expense Examples
- Prepaid Insurance
- Intangible Assets List
- Tangible vs Intangible Assets
- Net Tangible Assets
- Tangible vs Intangible
- Contingent Asset
- Tangible Assets
- Deferred Tax
- Deferred Income Tax
- Deferred Tax Assets
- Capital Expenditure (Capex)
- Capex Calculation
- Capital Expenditure Examples
- Capex vs Opex
- Salvage Value
- Residual Value
- Working Capital Management Importance
- Working Capital Examples
- Working Capital Loan
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Goodwill Formula
- Goodwill Amortization
- Goodwill Impairment Test
- Intangible Assets
- Intangible Assets Examples
- Negative Goodwill
- Goodwill Valuation
- Capitalized Interest
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Liabilities (68+)
- Shareholders Equity (91+)
- Income Statement (158+)
- Cash Flow Statement (17+)
- Accounting Careers (27+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
What is LIFO Method (Last In First Out)?
LIFO (Last In First Out Method) is one of the methods of accounting of inventory value on the balance sheet. Other methods are FIFO (First In First Out) and Average Cost Method.
LIFO Accounting means inventory which was acquired last would be used up or sold first. This implies that cost of goods sold would include the cost of inventory that was acquired recently. And the cost of inventory remaining as reported in balance sheet would be the cost of oldest inventory remaining.
Inventory forms a part of Current Assets in the balance sheet. It can be taken as collateral for loan/ working capital purpose. Hence it is necessary to have a measure of the value of Inventory on balance sheet. Amount of inventory purchased determines the cost of goods sold (COGS) which in turn determine the profitability and tax liability.
Due to above two main reasons, it is necessary to have a method to arrive at the value of inventory. Now, this is where LIFO accounting, FIFO and Average Cost Method come into the picture. Companies have to make disclosure in their financial statement about which method they are adopting for Inventory Valuation.
4.9 (1,067 ratings)
LIFO Method Example
In this LIFO method example, consider a case of M/s ABC Bricks Ltd, a distributor of cement bricks. It receives stock of bricks from the manufacturer on daily basis; however, the prices keep changing on daily basis. The company receives orders from customers on weekly basis.
The details of stock purchases are as follows:
On day 1 of the week, the company purchased 20 bricks for Rs. 25 per piece. This price increased to Rs. 35 per piece by the end of the week due to strong demand in the market.
Now on the 6th day, the company also receives an order of 50 bricks at a selling price of Rs 36 per piece. Assuming company is following LIFO method of inventory accounting, the purchase value of these 50 bricks being sold can be calculated as follows:
LIFO Accounting – Profit & Loss Calculations
Rs. 1710/- would be reported as COGS in Profit & Loss statement. There would be a profit of Rs 90/- (50 bricks x Rs 36 – Rs 1710/-) in this transaction and tax liability on profit would be Rs 27/- considering a flat tax rate of 30%.
LIFO Accounting – Balance Sheet Calculations
The remaining inventory reported on the balance sheet would be at their actual original cost of purchase. Thus the inventory value can be calculated as follows:
Impact Due to LIFO Method Example
- Due to LIFO method of inventory, COGS came out to be Rs 1710/- resulting in only Rs 90/- as profit. Since we considered purchase cost as that of last inventory which was purchased, our COGS remained higher ensuring lower profit and thereby lower tax outgo. Thus in inflationary conditions, LIFO Accounting (Last In First Out method) result in lower tax outgo.
- Since profit is on the lower side, the earning per share would be on lower side. Thus in inflationary conditions, LIFO Accounting (Last In First Out Method) results in lower EPS.
- The value of inventory remaining is Rs. 5320/- which is lower since it is valued at a purchase price of that particular batch of bricks. Due to LIFO method of inventory, the value of remaining inventory is considered lower than present market value/ replacement value of that inventory. Thus in inflationary conditions, LIFO method results in a lower valuation of stock on the Balance sheet than extent replacement value.
What is the Case in Deflationary Market Conditions?
In the deflationary market scenario, LIFO Accounting (Last In First Out Method) results in exactly reverse of above. viz:
- Higher tax outgo as COGS is reported lower and profits are higher.
- Due to higher reported profits, EPS would be higher.
- The inventory would be valued more than the current market value/ replacement value resulting in inflating balance sheet.
LIFO Method Advantages and Disadvantages
- In an inflationary market, use of LIFO methods results in higher COGS as inventory is valued at recent prices. This results in lower net income and thereby lower tax liability for the company. However due to lower net income, company’s reserves & surplus remain lower than what it would have been if LIFO (Last In First Out method) was not used. This results in lower net worth and lower EPS for shareholders.
- In the deflationary market, use of LIFO (Last In First Out Method) results in lower COGS as inventory is valued at recent prices. This results in higher net income and higher tax liability for the company. However due to higher net income, company’s reserves & surplus remain higher than what it would have been if LIFO (Last In First Out Method) was not used. This results in higher net worth and higher EPS for the shareholder.
Thus, LIFO method of inventory has both its benefits and drawbacks. Management has to weigh both and decide whether to use LIFO method for Inventory valuation or not as per business needs.
Global Treatment of LIFO Method of Inventory
- IFRS which is followed in most of the countries does not allow LIFO accounting.
- US GAAP allows LIFO method of inventory.
- In India, as per Revised AS 2, LIFO method of inventory is not permitted and companies would have to account inventory based on either FIFO or weighted average cost method.
LIFO Inventory Method Video
Significance for Investors
Investors should scrutinize accounting policies disclosed by the company and trend in change in accounting policies before making any decisions. Use of LIFO Accounting (Last In First Out Method) or FIFO or Average cost method has wide implications on P&L and Balance sheet as shown above.
- Ratios of Inventory | Formula | Examples
- LIFO Liquidation
- Formula to Calculate the Straight Line Depreciation Method
- Straight Line Depreciation Method
- FIFO vs LIFO | Examples | Advantages | Must know Differences
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Liabilities on Balance Sheet