Inventory Management Using the LIFO Method: From Theory to Practice

What is LIFO and Why Is It Important

Last In, First Out (LIFO), known in Thai as “latest in, out first,” is an accounting system for inventory valuation. The most recently received goods are recorded as expenses first, which is contrary to the natural instinct of inventory storage. However, it offers significant accounting benefits. When a company uses the LIFO method, the most recent purchase costs (which are often more expensive) are used to calculate the cost of goods sold (COGS) first, resulting in a lower reported net income.

The World of Volatile Cost Business

The importance of LIFO is especially evident in industries where product prices fluctuate unpredictably. Particularly during inflationary economic periods, oil companies serve as the best example. When crude oil prices rise during the year, the latest purchases reflect the higher market prices. By incorporating new (higher) costs into COGS calculations first, companies can significantly reduce taxable income.

Impact on Reporting and Taxes

A key trade-off of the LIFO method is that while companies save on taxes, the net profit shown to shareholders may be lower than actual. Large retail companies and agricultural producers often choose this method because it better reflects market realities during inflation periods. However, investors should be cautious when analyzing financial statements, as inventory on the balance sheet may be undervalued compared to actual market value.

Application in the Technology Sector

In the technology industry, where new products are continuously released, LIFO helps companies manage obsolete or leftover inventory. By accounting for the cost of newer (more expensive) products first, companies can reduce unnecessary expenses and maintain operational efficiency.

Global Limitations of LIFO

What investors need to know is that LIFO is not accepted under international accounting standards (IFRS), which are used in most countries outside the United States. Multinational companies operating across multiple jurisdictions must adjust their accounting practices to comply with these standards, making financial statements more complex and potentially requiring additional adjustments.

The Role of LIFO in Digital Asset Management

When it comes to trading and managing highly volatile assets such as cryptocurrencies, understanding accounting systems like LIFO becomes an indispensable tool. Both portfolio managers and market operators benefit from this knowledge. Applying LIFO can help make smarter financial strategic decisions.

Summary: Why LIFO Remains Necessary

In general, LIFO remains an important accounting tool for businesses seeking to manage costs and tax regulations. Despite its limitations globally, understanding this method is still crucial for financial analysis and business planning, whether in retail, agriculture, or digital asset markets. Knowledge of LIFO enables executives and investors to make more comprehensive and effective decisions.