what is Last in, First out (LIFO)?

**Conclusion**: The Last-In, First-Out (LIFO) inventory valuation method is a strategic choice for businesses, especially those in inflationary economies, as it can reduce taxable income and save on taxes. However, its use is jurisdiction-specific and may not be permissible in all regions. Understanding the implications of LIFO on financial statements is crucial for companies considering this method.

1. **LIFO Method Definition and Impact**:
- LIFO is an inventory valuation method where the most recently purchased goods are assumed to be sold first. This method results in a higher cost of goods sold (COGS) and lower remaining inventory value compared to First-In, First-Out (FIFO).
- In an inflationary economy, using LIFO can lead to a higher COGS, which reduces the business's taxable income and helps in lowering tax bills.
2. **Legal and Regulatory Considerations**:
- LIFO is legal in the United States under Generally Accepted Accounting Principles (GAAP), but it may not be permissible in other jurisdictions.
- Companies using LIFO must ensure they meet the legal requirements set by their local tax authorities.
3. **Comparative Analysis with FIFO**:
- The LIFO method is less common than FIFO and is typically used in warehouses with products that are non-perishable and have long sell-by dates.
- FIFO, on the other hand, is more commonly used and is preferred when the oldest inventory items are assumed to be sold first.
4. **Practical Example of LIFO**:
- For instance, in a scenario where the first batch of widgets costs $100 each and the last batch costs $200 each, using LIFO would result in the more expensive widgets being sold first, thus increasing the COGS and reducing inventory value.
5. **Business Strategies and LIFO Use**:
- Less than a third of American companies are believed to use LIFO, and its adoption is often strategic, aimed at reducing tax liabilities during periods of inflation.
- Businesses may choose LIFO when they want to match the cost of newer, more expensive goods with current revenue, even if it means expensing those goods more quickly.

By understanding the LIFO method and its effects on inventory valuation and tax liabilities, businesses can make informed decisions about which inventory management strategy to employ, depending on their specific financial goals and regulatory environments.