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 to be sold or used in production.

In practical terms, if a business receives inventory in several batches over time, when it comes to sales, the items from the latest batch (the "last in") are considered the first to leave the inventory (the "first out"). This approach can have significant implications for financial reporting, taxation, and cash flow. During periods of rising prices, for example, using LIFO can lead to lower reported profits and tax liabilities since the higher-cost items are matched against sales revenue.

The other choices present incorrect interpretations of inventory accounting terms. Understanding LIFO is crucial for businesses in assessing their financial positions accurately.