Definition of Last-In, First-Out (LIFO)

inventory method in which it is assumed that goods are sold in the reverse order of their acquisition. Thus cost of sales is based upon the most recent costs. Ending inventory is based upon the costs of the earliest purchase made. During a period of inflation, net income is lower under LIFO than under First-In, First-Out (FIFO) because current costs are being matched against revenue. However, the ending inventory figure in the balance sheet will be lower under LIFO than FIFO, because inventory is being stated in older dollars. A company can increase or decrease its earnings through the timing of inventory acquisitions.