Accounting Dictionary

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Last-In First-Out (LIFO)

Definition: Last-in first-out is an inventory costing methodology that bases the recognized cost of sales on the most recent costs incurred, while the cost of ending inventory is based on the earliest costs incurred. The underlying reasoning for this cost structure is the assumption that goods are sold in the reverse order of their manufacture.

In an inflationary period, the LIFO method will likely understate the value of inventory, since the cost of replacing it will be higher than its recorded cost.