What does LIFO stand for in inventory accounting?

LIFO stands for "Last In, First Out," which is a method used in inventory accounting to determine the cost of goods sold and ending inventory. This approach assumes that the most recently purchased or produced items are the first ones to be sold.

Using LIFO can provide businesses with certain tax advantages in times of rising prices, as the cost of the newest inventory (which may be higher due to inflation) is matched against current revenues, potentially leading to lower taxable income.

Additionally, LIFO can help align inventory costs with current market conditions; since companies are selling their latest inventory first, the remaining inventory on hand reflects older costs, which can also impact financial statements and ratios. This method is especially influenced by the flow of physical goods, allowing firms to better understand their inventory turnover and manage stock levels accordingly.

Other options like "Last In, Final Out" or "Last In, Fast Out" do not accurately reflect the LIFO concept, and "Last In, Last Out" contradicts the foundational principle of how LIFO operates, making them invalid interpretations within the context of inventory management.