# LIFO Method

## What is the LIFO method?

The LIFO method (Last In First Out) is a way of determining which items of inventory have been sold during a period and which items remain in stock at the end of the period. This will allow a business to determine the cost of goods sold and the value of the closing inventory. A method is needed because all items are not purchased at the same price.

The LIFO method assumes that the goods most recently put into inventory are used first. The inventory purchased last (in) is sold first (out).

## LIFO Method Example

By way of illustration.

October 1 Beginning inventory 100 units 5.00 cost per unit
October 4 Purchased 400 units 5.50 cost per unit
October 10 Sold 200 units

Under the LIFO method the following happens:

1. 100 units are added at 5.00 as opening stock
2. 400 units are added at 5.50 as purchases
3. 200 units are sold at with a cost of 5.50 (first units sold are those most recently put into inventory)

The cost of the goods sold would be given by 200 x 5.50 = 1,100.  After the items have been sold 300 units (100 + 400 – 200) remain in closing inventory with a cost of 200 x 5.50 + 100 x 5.00 = 1,600

The LIFO method used in this example is demonstrated in the tables below.

### LIFO Method Showing Units

The first table shows the movement in units. The items sold comprise 200 of the 5.50 units.  It also shows that the remaining closing inventory is 200 of the 5.50 units and 100 of the 5.00 units.

 5.00 5.50 Units Beginning 100 100 Additions 400 400 Sales – 200 -200 Ending 100 200 300

### LIFO Method Showing Value

This table converts the units in the table above to values at either 5.00 or 5.50 per unit.

 5.00 5.50 Value Beginning 500 500 Additions 2,200 2,200 Sales – 1,100 -1,000 Ending 500 1,100 1,600

The LIFO method is one of the available methods used in inventory management. Clearly the method used to determine which units are sold and which remain in closing inventory determines the value of the cost of goods sold and the closing inventory. As profit depends on the cost of goods sold, the method chosen will affect the profits of a business.

Other methods of determining inventory movements include FIFO (first in first out) and Average Cost.

LIFO Method November 6th, 2016

## Related pages

how to do closing entries in accountingaverage number of days to collect accounts receivabledu pont chartaged accounts receivable reportdistinguish between trade discount and cash discountcash receipts journal sampleasset retirement obligation journal entryamortization expense examplesample of retained earnings statementdouble declining balance ratemeaning of consignment accountannuity mortgage formulaexamples of contra assetsexcel accounting tutorial pdfstock turnover calculationaccounting templates excel worksheetsytm in excelzero coupon bonds formulaexcess and obsolete inventory reservewhat is carriage on purchasesnature of bills receivable accountstraight line depreciation examplesaccounting entry for accrued interestwhat is an accounts receivable ledgeraccounts ledger templateprinciple of double entry bookkeepingpaid dividends to stockholders journal entrysoyd depreciationhow to calculate stock split 2 for 1how to record collection of accounts receivableeffective interest amortization calculatorrestaurant chart of accounts examplethe normal balance of the accumulated depreciation account is debitbookkeeping process flowchartcalculate fifochart of accounts for freight forwarding companyhow to calculate an annuity factormanufacturing overhead controlpetty cash on balance sheettypes of suspensepresent value of an ordinary annuity calculatorexample of retained earnings statementmarkup vs margin formulaprepaid expenses treatment in balance sheetjournal entry of accrued incomeallowance for doubtful debts in balance sheetprepaid freight termsaccrued income meaningpresent value of annuity tabledisposal of fixed assets double entryapportionment of overheadsweighted average contribution margin per unitexcel irr functionledger samplesirr in excelaverage accounts receivable formulajournal entry for credit saleshow to record fixed assets in quickbookspurchasing price varianceformula of total asset turnover ratiopurchase ledger control account formathow to calculate ear on financial calculatornet profit turnover ratio formulafifo equationrumus profitability indexledger book entryadjusting entry for merchandise inventorypresent value of a lump sum formuladays sales in accounts receivable formulacalculate the total estimated bad debtsaccounts receivable examplescogs accountingthe accounting for cash discounts and trade discounts arehow to calculate perpetual inventoryfob meaning shippingredeemable convertible preferred stock