In LIFO inventory accounting, what happens to the most recently acquired items?

In LIFO (Last In, First Out) inventory accounting, the concept centers around the sequence of inventory usage and sales. Specifically, LIFO assumes that the most recently acquired items are sold first. This means that when a company sells its inventory, it will account for the last items it purchased before the sale as the ones that are being sold.

This method is particularly useful in times of rising prices, as it allows businesses to match newer, higher costs against current revenues, thereby potentially reducing taxable income. It’s important to note that this accounting method ultimately affects both the cost of goods sold (COGS) and the ending inventory value on the balance sheet.

The other options do not accurately describe the LIFO method. For instance, stating that the most recent items are stored indefinitely is incorrect since inventory is meant to be sold. Similarly, claiming that they are written off immediately misunderstands the purpose of LIFO, which is to match sales against recent costs. Lastly, while LIFO can lead to a lower ending inventory value in inflationary periods, it does not automatically contribute to the highest ending inventory; rather, older, less expensive items may comprise that ending inventory.