The last in, first out (LIFO) method is used to place an accounting value on inventory. The LIFO method operates under the assumption that the last item of inventory purchased is the first one sold.

The reason why companies use LIFO is the assumption that the cost of inventory increases over time, which is a reasonable assumption in times of inflating prices. If you were to use LIFO in such a situation, the cost of the most recently acquired inventory will always be higher than the cost of earlier purchases, so your ending inventory balance will be valued at earlier costs, while the most recent costs appear in the cost of goods sold. By shifting high-cost inventory into the cost of goods sold, a company can reduce its reported level of profitability.

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