ZACH DE GREGORIO, CPA
www.WolvesAndFinance.com

In last week’s video, I mentioned LIFO very briefly. I wanted to talk about LIFO in more detail, because there are some important accounting ideas you need to understand.
Let us start with the definition. What is LIFO and FIFO? LIFO stands for Last In First Out, and FIFO stands for First In First Out. These are the most common methods of inventory valuation. There are actually many more methods, but these are the most common. LIFO is only allowed in the United States, because GAAP accounting standards allow LIFO, whereas international accounting standards do not.
LIFO and FIFO really deal with time. You create a set of financial statements at a moment in time, but you purchase inventory many different times. You need to figure out your Cost of Goods Sold (COGS). LIFO means the most recent purchases are sold first. FIFO is the opposite, where you sell the oldest items first.
The key concept you should understand is that inventory is an estimate. When you look at your financial statements, the number for inventory is not an exact value. There are different methods for calculating that number, and they all result in different amounts. Since we have alternate methods of valuation, LIFO and FIFO are not explaining what actually happened to your bank account, it is just how you report it. In your bank account, cash went out when you made the purchase, cash came in when you sold it, and some value remains for your current inventory. LIFO and FIFO determine that value.

Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

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