What is Last-In, First-Out (LIFO)?

Last-In, First-Out (LIFO) is an inventory valuation method where it is assumed that the most recently purchased items are the first ones to be sold. During periods of rising prices, LIFO results in a higher Cost of Goods Sold (COGS) and a lower net income compared to the FIFO method.

For Startups: It's important for Indian startups to know that the LIFO method is not permitted for financial reporting under Indian Accounting Standards (Ind AS) or for tax purposes in India. Companies in India must use either the FIFO or the weighted-average cost method.

Example: A company buys an item for ₹100 and later buys another for ₹120. When one item is sold, under LIFO, the COGS would be recorded as ₹120. This method is primarily used in the US for tax benefits during inflationary periods.