LIFO
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LIFO stands for Last-In First-Out. It is a method of accounting for inventory in which the goods that are last purchased are assumed to be the first ones sold. Under this method, the cost of the most recent inventory purchase is matched against revenue first, resulting in a lower taxable income.
The LIFO method assumes that the cost of the goods sold is equal to the cost of the most recently acquired units. As a result, the cost of goods sold is calculated based on the most recently purchased items, while the ending inventory is valued based on the oldest units in stock.
The LIFO method is commonly used by businesses that want to minimize their taxable income. It works well for companies that specialize in products that do not age or deteriorate quickly, as there is often no significant difference in quality between older and newer inventory.
However, LIFO can lead to account distortions if there are significant fluctuations in inventory costs over time. Additionally, LIFO can lead to inaccurate valuations in situations where the oldest inventory items are not representative of the current market or are obsolete.
Overall, the decision to use LIFO or another inventory accounting method will depend on the nature of the business and the fluctuations in inventory costs over time.
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