Some accountants in the US often advise using the LIFO method for your inventory accounting when you have stock with frequently changing costs. Using LIFO as a preferred method for such scenarios helps match the latest cost of inventory with the sales revenue of the current period. This can be a more straightforward approach for initial inventory valuation as well as for tax filing purposes.
Unlike FIFO, LIFO has some disadvantages:
The same example used earlier can be used to show the LIFO method for calculating the cost of goods sold (COGS).
|Buys an Item||$100|
|Buys the same item after inflation||$150|
|Sells an item for $175||-$150|
In the LIFO method, when calculating profit, the most recent purchasing cost is subtracted from its selling price to calculate the reported profit. As you can see, using the LIFO method for inventory valuation and accounting lowers your return profit.
For a more in depth understanding of LIFO and a comparison to FIFO, check out our blog on the subject.