LIFO : LIFO stands for Last-In, First-Out.

It is a method used for cost

flow assumption purposes in cost of good sold calculation. The LIFO
method assumes that the most recent products added to a company’s
inventory have been sold first. The costs paid for those recent products
are the ones used in the calculation.

Here is an example of a business using the LIFO method in its

accounting.

Brad runs a small bookstore in Boston’s airport called Brad’s Books. He

has two partners but they do not oversee the day-to-day operations,
they are merely investors. Brad does most of the work and has been in
business for two months.

Brad prides himself on always making sure his store carries the latest
hardcover releases, because traditionally sales of them have been
reported as very good. However, the book industry has been going
through a hard time recently with an increase in customers switching to
digital readers, meaning less demand. As such, his inventory costs have
been steadily increasing.

Inventory

Month Amount (books) Price paid

Nov 7 100 18$ per
Nov 21 100 18$ per
Nov28 125 18.25$ per
Dec 4 150 18.50$ per
Dec 7 150 19.25$ per
Dec 15 150 20$ per
On Dec 31, Brad looks through the store sales and realizes that Brad’s
Books has sold 450 books to-date. Brad would now like to run a report
for his partners that shows the cost of goods sold.

Using the LIFO method, Brad would start with his most recent per book
cost of $20.00. However, he cannot apply that unit price to all 600
books, because he did not pay that price for all 600. What he can do is
this:

Cost of Goods Sold Calculation

150 books x $20.00: $3,000.00 (using Dec 15 cost)

150 books x $19.25: $2887.50 (using Dec 7 cost)

150 books x $18.50: $2775.00 (using Dec 4 cost)

COGS Total: $8662.50

COGS Total: $8662.50