Legal Definitions - last-in, first-out

LIFO (Last-In, First-Out) is an accounting method used to value a company's inventory and determine the cost of goods sold. The term stands for Last-In, First-Out and operates on the assumption that the most recently acquired items in inventory are the first ones to be sold or used. This method aims to match the most current costs of inventory with the current revenues generated from sales.

Here are some examples to illustrate how LIFO works:

• Electronics Retailer: Imagine "Gadget Central," a store that sells high-demand consumer electronics like the latest smartphones or gaming consoles. They frequently receive new shipments of these items, and the cost they pay for each new shipment might increase over time due to inflation or supply chain issues. When Gadget Central sells a smartphone, the LIFO method assumes that the cost associated with that sale is the cost of the most recently purchased smartphone in their inventory. This means if they bought a batch for $800, then another for $820, and then a third for $850, a sale would be accounted for using the $850 cost first. This approach helps the company reflect its most current inventory costs against its current sales revenue.

• Manufacturing Company: Consider "SteelFab Inc.," a company that manufactures metal components and regularly purchases large quantities of raw steel. The price of steel can fluctuate significantly. If SteelFab buys a shipment of steel in January at $1,000 per ton, another in March at $1,050 per ton, and a third in May at $1,100 per ton, and then begins production in June, the LIFO method would assume that the steel used in production comes from the most recent shipment (the $1,100 per ton batch from May). By expensing these higher, more current costs first, SteelFab's financial statements would reflect a more up-to-date cost of materials against the revenue generated from selling its finished components.

• Apparel Wholesaler: "TrendSetter Apparel" is a wholesaler that imports seasonal fashion items. They receive new collections throughout the year, and the cost of these items can vary with each order due to currency exchange rates or supplier price changes. When TrendSetter sells a batch of dresses to a retail store, the LIFO accounting assumption is that the cost of those dresses is derived from the latest shipment received. If the cost of importing new inventory has been rising, LIFO would assign these higher, more current costs to the dresses sold, providing a more accurate reflection of the current cost of goods sold relative to current revenues.