1. What is LIFO Inventory Method?

The LIFO (Last-In, First-Out) method assumes that the most recently purchased items are sold first. This affects both the cost of goods sold (COGS) and ending inventory valuation, particularly in times of changing prices.

2. How Does LIFO Calculation Work?

The calculator uses the LIFO formula:

Where:

• Beginning Inventory — Inventory value at start of period
• Purchases — Additional inventory purchased during period
• Sales (COGS) — Cost of goods sold (using most recent costs first)

Explanation: Under LIFO, the cost of the most recently purchased inventory is matched against revenue first, leaving older costs in ending inventory.

3. Importance of Inventory Valuation

Details: Proper inventory valuation is crucial for accurate financial reporting, tax calculations, and business decision making. LIFO often results in lower taxable income during periods of inflation.

4. Using the Calculator

Tips: Enter all values in dollars. Beginning inventory and purchases should reflect actual costs. Sales (COGS) should be calculated using most recent purchase prices first.

5. Frequently Asked Questions (FAQ)

Q1: When is LIFO most beneficial?
A: LIFO is most beneficial during periods of rising prices as it results in higher COGS and lower taxable income.

Q2: Is LIFO allowed under IFRS?
A: No, LIFO is prohibited under International Financial Reporting Standards (IFRS) but permitted under U.S. GAAP.

Q3: How does LIFO affect financial ratios?
A: LIFO typically results in lower inventory values on the balance sheet and can affect ratios like current ratio and inventory turnover.

Q4: What is the LIFO reserve?
A: The LIFO reserve is the difference between inventory reported under LIFO and what it would be under FIFO.

Q5: Can I switch from FIFO to LIFO?
A: Yes, but it requires IRS approval and must be done at the start of the tax year using Form 970.