Last-In, First-Out

last-in, first-out (LIFO)

An accounting method for identifying the order in which items are used or sold. With last-in, first-out, the most recently acquired items are assumed to be sold first. During a period of inflation, last-in, first-out accounting tends to result in high costs that reduce reported profits. The reduced profits result in a lower income-tax liability. Compare first-in, first-out.

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Last-In, First-Out

In accounting, a technique for valuing inventory by treating inventory acquired most recently as if it were sold first. The sale of inventory is recorded against the purchase price of the most recently acquired inventory, even if the physical goods are not the same. In times of high inflation, the last-in, first out technique reduces a business' inflation risk. It also may reduce one's tax liability. For these reasons, most American firms have used this technique in their accounting since the 1970s.