What is the last-in, first-out (LIFO) method of inventory management?

The last-in, first-out (LIFO) method of inventory management operates on the principle that the most recently acquired items are sold first. This approach is particularly beneficial for businesses in situations where the cost of inventory increases over time, allowing companies to match the expense of the most recent items against current revenues.

When a business sells its most recently acquired products first, it can often reflect the most current market prices in its cost of goods sold, potentially leading to tax advantages and more accurate profit reporting during periods of inflation. Understanding this concept is crucial for effective inventory management and financial analysis, as it directly impacts cash flow and tax liabilities.