## Last in first out (LIFO) cost flow method

Subject: Accounting | Topics:

The method of last-in, first-out assumes that the cost of the goods purchased last is charged to the cost of goods sold first.

Last-in, first-out (LIFO) inventory costing method assumes that the cost of latest inventories acquired are the first to be recognized as the cost of goods sold.

In the example above, the cost of \$5,500 Ford will be assigned to the cost of goods sold.

## Example of LIFO cost flow method

Under LIFO, the cost of goods sold is calculated by using the costs of drills purchased last. The computation is shown below:

##### Illusration: Brid’s Drills cost of goods sold under LIFO
 Purchase Two 80 units x \$20 = \$1,600 Purchase One 120 units x \$18 = \$2,160 Beginning Inventory 70 units x \$15 = \$1,050 Total 270 units \$4,810

The 30 units from the beginning inventory remain in the Inventory account.

The net income is determined by subtracting the cost of goods sold from sales: \$5,990 (\$10,800 – \$4,810). The income tax to be paid is \$1,797 (\$5,990 x 30%).

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