LIFO is an inventory accounting method which has been recognized by the Internal Revenue Code since 1939.
This method is created under the assumption that you sold the new stuff as soon as you purchased it
LIFO implies that the items which has been recently purchased will be sold first. Cost of goods sold is calculated by using latest prices, while ending inventory is calculated using the oldest prices.
Business with inflating inventory costs like LIFO.
X runs a Candy shop. He enters into the following transactions during July:
July 1 Purchases 1,000 candy at Rs.1 each. July 10 Purchases 800 candy at Rs.1.20 each. July 15 Sells 600 candy at Rs.2 each. Number of candies at the end of the month?
1,000 + 800 – 600 = 1,200 candies
Purchases 1,000 candy at Rs.1 each
Purchases 800 candy at Rs.1.20 each
Sells 600 candy at Rs.2 each
Cost of Goods Sold
As you can see, even though the purchases amounted to Rs.1,200, the cost of goods sold (or cost of sales) amounted to Rs.600.