last in, first out (LIFO)

1. Accounting: Method of inventory valuation based on the assumption that the goods purchased most recently (the last in) are sold or used first (the first out). The remaining items are assumed to have been purchased at successively-earlier periods. In this method, value of the inventory at the end of an accounting period is based on the value of items purchased earliest. During periods of high inflation rates, the LIFO method yields lower value of the ending inventory, higher cost of goods sold, and a lower gross profit (hence lower taxable income) than that yielded by the application of the first-in, first-out (FIFO) method. During prolonged inflationary periods, however, LIFO method can seriously understate the value of inventory because the cost of replacing it would be much higher than the value shown in accounts. The 'Out' office-basket is an illustration of LIFO method.

2. Banking: Interest computation method based on the assumption that the last-in funds (on deposit for the shortest-period) are withdrawn first. Hence, interest on the account balance will be computed by applying the interest rate current at the time of its latest-deposited funds.