LIFO (Last In, First Out)

LIFO, standing for "Last-In, First-Out," is a method used in inventory management and accounting to track and calculate the value of goods or assets. Unlike FIFO, LIFO operates under the assumption that the most recently purchased or acquired items (the newest) are the first ones to be sold or used. So, when you sell something or calculate costs, you'd count the newest items first. This approach can be advantageous in certain situations, particularly when the prices of goods increase over time.

Example:

In simple terms, it's like a stack of plates in a cafeteria - the last plate that's put on the stack is the first one taken off when someone comes along to get their food. In financial terms, it's a method used to calculate the cost of items sold or used, where it's assumed that the last items bought are the first ones sold.

Let's look at a couple of examples:

Example with Books: Imagine you're a bookstore owner. In January, you bought 10 copies of a book for $5 each. Then, in March, you bought another 10 copies of the same book, but the price had gone up to $7 each. Now in April, you sell 5 copies of the book. According to the LIFO method, you'd assume that the books you're selling are the ones you bought last (in March for $7 each). So, your cost for each book sold would be $7.
Example with Stocks: Let's say you bought 50 shares of Company X in 2022 for $20 each. Later, in 2023, you bought another 50 shares of the same company for $30 each. If you decide to sell 30 shares in 2024 when the price is $35 each, using the LIFO method, you'd assume that the shares you're selling are the ones you bought most recently (in 2023 for $30 each). Therefore, your profit for each share sold would be $5 ($35 selling price - $30 cost price).
Example with Bitcoin: In January, you buy 1 Bitcoin for $30,000. In February, you buy another Bitcoin when the price has risen to $35,000. So now, you have 2 Bitcoins that you bought at different prices. Now, let's say in March, the price of Bitcoin rises further to $40,000 and you decide to sell 1 Bitcoin. With the LIFO method, you consider that the Bitcoin you're selling is the one you bought most recently, in February for $35,000. Therefore, your profit (or capital gain for tax purposes) from this sale would be $5,000 ($40,000 selling price - $35,000 purchase cost).

LIFO can be beneficial in situations where the value of the asset (in this case, Bitcoin) increases over time because it could potentially minimize your taxable income and therefore your tax liability.

LIFO (Last In, First Out)

Example:

Related Terms:

Category: