Editing FIFO and LIFO accounting (section)

==LIFO==
{{Other uses|LIFO (disambiguation){{!}}LIFO}}
"LIFO" stands for ''last-in, first-out'', meaning that the most recently purchased items are recorded as sold first. From the 1970s, some U.S. companies shifted towards the use of LIFO,<ref>A sample used in research undertaken by [[Nicholas Dopuch]] and Morton Pincus identified 70 firms which switched from FIFO to LIFO during the period 1965-78: Dopuch, N. and Pincus, M., [https://www.jstor.org/stable/pdf/2491112.pdf Evidence on the Choice of Inventory Accounting Methods: LIFO Versus FIFO], ''Journal of Accounting Research'', Volume 26, No. 1, Spring, 1988, p. 34, accessed on 11 March 2025</ref> which reduces their income taxes in times of [[inflation]], but since [[International Financial Reporting Standards]] (IFRS) banned LIFO, more companies returned to FIFO.{{citation needed|date=December 2016}} One third of American companies are thought to use LIFO, according to the "Save LIFO Coalition", which argues in favor of the retention of the LIFO method.<ref>Save LIFO Coalition, [https://savelifo.org/faqs-resources FAQs and Resources], accessed on 11 March 2025</ref>

LIFO is used only in the United States, which is governed by the [[generally accepted accounting principles]] (GAAP). Section 472 of the [[Internal Revenue Code]] directs how LIFO may be used if necessary. The code directs that LIFO may be used "only if the taxpayer establishes" that they have no other way of valuing their inventory.<ref>[https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapE-partII-subpartD-sec472.pdf Internal Revenue Code, § 472(c): Last-in, first-out inventories], accessed 23 December 2016</ref>

In the FIFO example above, the company (Foo Co.), using LIFO accounting, would expense the cost associated with the first 75 units at $59, 125 more units at $55, and the remaining 10 units at $50. Under LIFO, the total cost of sales for November would be $11,800. The ending inventory would be calculated the following way:

{| class="wikitable"
|-
! '''Number of units''' !! '''Price per unit''' !! '''Total'''
|-
| Remaining 90 units || $50 || $4500 ($50 x 90 units)
|-
| '''Total''' ||  || $4500
|}
The balance sheet would show $4500 in inventory under LIFO.

The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the ''LIFO reserve'' (in the example above, it is $750, i.e. $5250 - $4500). This reserve, a form of [[contra account]], is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.<ref>{{cite web |url=http://www.accountingtools.com/lifo-reserve-definition |title=LIFO Reserve Definition |publisher=AccountingTools |access-date=2011-11-09 |archive-date=2015-06-22 |archive-url=https://web.archive.org/web/20150622061421/http://www.accountingtools.com/lifo-reserve-definition |url-status=dead }}</ref>

In most sets of accounting standards, such as the International Financial Reporting Standards, FIFO (or LIFO) valuation principles are "in-fine" subordinated to the higher principle of [[lower of cost or market]] valuation.

In the United States, publicly traded entities which use LIFO for taxation purposes must also use LIFO for financial reporting purposes,<ref>{{cite web|url=http://www.mondaq.com/unitedstates/x/174108/IRS+HRMC/LIFO+Conformity+Rules |title=LIFO Conformity Rules |publisher=Mondaq |access-date=2015-07-09}}</ref> but such companies are also likely to report a LIFO reserve to their [[shareholders]]. A number of tax reform proposals have argued for the repeal of LIFO tax provision.