LIFO stands for “Last In First Out.” A method used in logistics and finance, where it means that the last assets bought are the first to be sold.
What is LIFO? Definition of the term
LIFO, or“Last In First Out” as opposed to LOFO, is a method of inventory management where what is last received into the warehouse is first issued. It is used in industry and commerce because it ensures that products are fresh and not out of date. LIFO is therefore beneficial for manufacturers and customers, but not always for the company itself. Why? Because product prices can fluctuate over time, and a company can incur losses if, for example, a product previously bought at a lower price is sold at a higher one. Therefore, LIFO is not a one-size-fits-all solution and is not used in all industries.
What is LIFO based on?
LIFO, or Last In First Out, is an inventory management method in which recently delivered products are the first to be withdrawn from sale. It is the opposite of FIFO (First In First Out), in which the first products delivered are the first to be withdrawn from sale. LIFO is a popular method of inventory management in industry because it helps reduce tax costs.
Where is LIFO applied?
LIFO is used for goods whose price is increasing or decreasing. For this reason, LIFO is often used in industries where material prices can fluctuate. LIFO can also be applied to cash. An example is when someone has several bank accounts and deposits money into them in different amounts. In such a situation, LIFO means that the last deposits are the first to be withdrawn. LIFO is advantageous for businesses because it allows them to reduce income tax. This is possible because revenues are accounted for at lower prices and expenses at higher prices. As a result, income is lower and so is income tax.
Benefits of using the LIFO strategy
LIFO has several advantages. First, it allows the company to avoid VAT, since the tax is charged on the last goods delivered. Second, LIFO reduces warehousing costs because new goods are delivered in place of old ones. Third, LIFO can help a company better manage its inventory because it allows it to track which products are the most popular.
LIFO does have some drawbacks, however. First, it can be difficult to put into practice because it requires companies to track delivery dates accurately. Second, LIFO can lead to higher costs, since new merchandise is usually more expensive than old.
