Last in First out (LIFO) Method with Example

The last in first out (LIFO) method assumes that inventory purchased last is first sold and the oldest inventory remains unsold. In other words, the oldest cost of inventory remains in the balance sheet while the newer cost of inventory is assigned to the cost of goods sold. As such FIFO method does not follow most companies’ natural inventory flow. Therefore, this method is not allowed by International Financial Reporting Standards (IFRS), however prevalent across US.

The LIFO method is exactly opposite to FIFO method. Under LIFO method, when prices of goods increase, the cost of goods sold become higher and the cost of inventory becomes lower and the net profit also becomes lower. This result fewer income tax to pay. This is the reason a company would choose to use LIFO method.

Last in first out (LIFO) method can be used in periodic inventory system and perpetual inventory system. Let’s use LIFO method in both inventory systems.

Example 1: (Periodic Inventory System)

Find cost of ending inventory, cost of goods sold and gross profit using LIFO method under periodic system. Take data from the given below table:

Date	Description	Units	Per Unit Cost	Amount
1-Jan	Inventory	100	20	2000
10-Mar	Purchased	200	25	5000
15-May	Purchased	100	25	2500
20-Aug	Sold	200	30	6000
10-Sep	Purchased	100	25	2500
15-Oct	Sold	200	30	6000
20-Nov	Purchased	100	25	2500
5-Dec	Purchased	200	25	5000

Computation for ending units/Units in hand:

Opening units	100
Total purchased units	700
Total units available for sale	800
Total sold units	400
Ending units	400

Computation for cost of ending inventory:

Abc Corporation
Cost of Ending Inventory
By using Last In First Out Method

Date	Description	Units	Per Unit Cost	Amount
01-Jan	Inventory	100	20	2000
10-Mar	Purchased	200	25	5000
15-May	Purchased	100	25	2500
Cost of ending inventory				9500

Computation for Cost of Goods Sold:

Opening Inventory	2000
Purchases	17500
Cost of goods available for sale	19500
Ending inventory	9500
Cost of goods sold	10000

Computation for Gross Profit:

Sale	12000
Cost of goods sold	10000
Gross profit	2000

Example 2: (Perpetual Inventory System)

Find cost of ending inventory, cost of goods sold and gross profit using LIFO method under perpetual system. Take data from the above table:

Computation for cost of ending inventory and cost of goods sold:

Computation for Gross Profit:

Sale	12000
Cost of goods sold	10000
Gross profit	2000

We can see both periodic and perpetual inventory system provide same cost of ending inventory, cost of goods and gross profits using LIFO. The periodic and perpetual are different inventory methods but yield same results.