What does LIFO stand for in inventory accounting?

LIFO stands for "Last In, First Out," which is an inventory valuation method used in accounting. This method assumes that the most recently purchased or produced items are the first ones to be sold. In a situation where inventory costs are rising, using LIFO can result in lower taxable income, as it matches the higher costs of newer inventory against current revenues.

Understanding LIFO is important because it directly impacts a company's financial statements and tax obligations. For businesses that operate in industries with fluctuating prices, the choice between LIFO and other methods (like FIFO, which stands for First In, First Out) can significantly affect their financial analysis and reporting. This makes a solid grasp of LIFO essential for anyone studying business education and accounting practices.