Last In First Out (LIFO)

LIFO stands for Last in First out. It implies that whenever the inventory is reported as sold, its cost will be taken equal to the cost of the latest inventory that was added to the stock. The most convenient methods of valuing inventory, are by using FIFO (First in First Out) and LIFO.

The main advantages of the LIFO method are as follows:

• LIFO method is appropriate for matching cost and revenue.
• It is simple to operate and easy to understand.
• It facilitates complete recovery of material cost.
• It is most suitable when prices are rising.

Disadvantages of the LIFO method

The major disadvantages of the LIFO method are as follows:

• Inventory valuation does not reflect the current prices and therefore is useless in the context of current conditions.
• Due to variation of prices, comparison of cost of the similar job is not possible.
• Calculations become complicated and cumbersome when rates of receipts are highly fluctuating.