Inventory cost accounting using the LIFO method. The acronym LIFO stands for Last In First Out. #LIFO is a US-based accounting fiction in #costaccounting, mainly for tax reasons, that is a major determinant of Cost Of Goods Sold and Gross Profit.

⏱️TIMESTAMPS⏱️
00:00 LIFO definition (accounting)
00:43 LIFO example
01:51 LIFO inventory valuation
04:35 LIFO and COGS
05:47 LIFO accounting summary

When I say “US-based accounting fiction”, I mean that LIFO is an acceptable method under US Generally Accepted Accounting Principles (US GAAP), while it is prohibited under International Financial Reporting Standards (IFRS). The comment “mainly for tax reasons” will become clear to you when seeing the numerical results of the example we go through.

Let’s work through an example of LIFO. We will do the inventory accounting for a hypothetical company called Toy Giraffe Inc. As the name suggests, this is a company buying and selling toy giraffes.

If cost per unit goes up over time, and selling price stays flat, you make the lowest profit per unit in the earlier periods, as you “sell the newest inventory first”. This is what the comment “mainly for tax reasons” relates to. The lower the inventory value, and the higher the Cost Of Goods Sold, the lower the taxable income you generate in the period. The lower your taxable income, the lower the tax charge.

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Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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