Inventory Valuation Methods – LIFO

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In case the company has a number of inventory items acquired during a particular period and having different prices, certain valuation methods has to be applied to calculate Cost of Goods Sold and value of the inventory remaining on hand. These methods are:

• FIFO (First-in-First-out)
• LIFO (Last-in-First-out)
• Average Price
• Exact price

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LIFO (Last-in-First-out)

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Applying LIFO inventory valuation method for accounting purposes, it is assumed inventory is sold starting from the recently acquired items, i.e. the latest acquired inventory items are being sold first.

The name of the method means that item which included in inventory last is sold first. The picture below demonstrates this principle:

• The company acquired  3 items acquired during July
• One item is sold

Applying LIFO inventory valuation method, it is assumed that latest acquired inventory item is sold.

• Therefore Cost of Goods Sold will amount to $95 – cots of the inventory item acquired on July 20
• Cost of inventory on hand, i.e. cost of closing inventory, will amount to the value of the inventory acquired the earliest. These will be items acquired on July 5 and 12.

Further explore also other inventory valuation methods:

• FIFO
• Average Price
• Exact Price

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LIFO Method – Last In First Out – Visual Material

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LIFO Method – Last In First Out – Video

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