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Last-In, First-Out (LIFO) Inventory Method

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Definition of Last-In, First-Out (LIFO) Inventory Method

Last-In, First-Out (LIFO) Inventory Method Image 1

Last-In, First-Out (LIFO) Inventory Method

The inventory cost-flow assumption that assigns the most recent inventory acquisition costs to cost of goods sold. The earliest inventory
acquisition costs are assumed to remain in ending inventory.



Related Terms:

Blanket inventory lien

A secured loan that gives the lender a lien against all the borrower's inventories.


Borrower fallout

In the mortgage pipeline, the risk that prospective borrowers of loans committed to be
closed will elect to withdraw from the contract.


Breakout

A rise in a security's price above a resistance level (commonly its previous high price) or drop
below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing
move in the same direction. Can be used by technical analysts as a buy or sell indicator.


Buyout

Purchase of a controlling interest (or percent of shares) of a company's stock. A leveraged buy-out is
done with borrowed money.


Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.


Cashout

Refers to a situation where a firm runs out of cash and cannot readily sell marketable securities.


Current rate method

Under this currency translation method, all foreign currency balance-sheet and income
statement items are translated at the current exchange rate.


Last-In, First-Out (LIFO) Inventory Method Image 2

Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.


Days' sales in inventory ratio

The average number of days' worth of sales that is held in inventory.


Days' sales outstanding

Average collection period.


Direct estimate method

A method of cash budgeting based on detailed estimates of cash receipts and cash
disbursements category by category.


Dividend payout ratio

Percentage of earnings paid out as dividends.


Down-and-out option

Barrier option that expires if asset price hits a barrier.


Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.


Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.


Feasible target payout ratios

Payout ratios that are consistent with the availability of excess funds to make
cash dividend payments.


First notice day

The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.


First-call

With CMOs, the start of the cash flow cycle for the cash flow window.


First-In-First-Out (FIFO)

A method of valuing the cost of goods sold that uses the cost of the oldest item in
inventory first.


First-pass regression

A time series regression to estimate the betas of securities portfolios.


Flow-through method

The practice of reporting to shareholders using straight-line depreciation and
accelerated depreciation for tax purposes and "flowing through" the lower income taxes actually paid to the
financial statement prepared for shareholders.


Full-payout lease

See: financial lease.


Input-output tables

Tables that indicate how much each industry requires of the production of each other
industry in order to produce each dollar of its own output.


Inventory

For companies: Raw materials, items available for sale or in the process of being made ready for
sale. They can be individually valued by several different means, including cost or current market value, and
collectively by FIFO, lifo or other techniques. The lower value of alternatives is usually used to preclude
overstating earnings and assets.
For security firms: securities bought and held by a broker or dealer for resale.


Inventory loan

A secured short-term loan to purchase inventory. The three basic forms are a blanket
inventory lien, a trust receipt, and field warehousing financing.


Inventory turnover

The ratio of annual sales to average inventory which measures the speed that inventory
is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales.


Investor fallout

In the mortgage pipeline, risk that occurs when the originator commits loan terms to the
borrowers and gets commitments from investors at the time of application, or if both sets of terms are made at closing.


Just-in-time inventory systems

Systems that schedule materials/inventory to arrive exactly as they are
needed in the production process.


Last split

After a stock split, the number of shares distributed for each share held and the date of the
distribution.


Last trading day

The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.


Last-In-First-Out (LIFO)

A method of valuing inventory that uses the cost of the most recent item in
inventory first.


Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.


LIFO (Last-in-first-out)

The last-in-first-out inventory valuation methodology. A method of valuing
inventory that uses the cost of the most recent item in inventory first.


Lock-out

With PAC bond CMO classes, the period before the PAC sinking fund becomes effective. With
multifamily loans, the period of time during which prepayment is prohibited.


Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.


Management buyout (MBO)

Leveraged buyout whereby the acquiring group is led by the firm's management.


Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.


Netting out

To get or bring in as a net; to clear as profit.


Normalizing method

The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.


Open-outcry

The method of trading used at futures exchanges, typically involving calling out the specific
details of a buy or sell order, so that the information is available to all traders.


Option elasticity

The percentage increase in an option's value given a 1% change in the value of the
underlying security.


Out-of-the-money option

A call option is out-of-the-money if the strike price is greater than the market price
of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of
the underlying security.


Outright rate

Actual forward rate expressed in dollars per currency unit, or vice versa.
outsourcing
he practice of purchasing a significant percentage of intermediate components from outside suppliers.


Outstanding share capital

Issued share capital less the par value of shares that are held in the company's treasury.


Outstanding shares

Shares that are currently owned by investors.


Payout ratio

Generally, the proportion of earnings paid out to the common stockholders as cash dividends.
More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.


Perfected first lien

A first lien that is duly recorded with the cognizant governmental body so that the lender
will be able to act on it should the borrower default.


Price elasticities

The percentage change in the quantity divided by the percentage change in the price.


Priced out

The market has already incorporated information, such as a low dividend, into the price of a stock.


Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities'
net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared
with pooling and will result in lower net income.


Residual method

A method of allocating the purchase price for the acquisition of another firm among the
acquired assets.


Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.


Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.


Stockout

Running out of inventory.


Take-out

A cash surplus generated by the sale of one block of securities and the purchase of another, e.g.
selling a block of bonds at 99 and buying another block at 95. Also, a bid made to a seller of a security that is
designed (and generally agreed) to take him out of the market.


Target payout ratio

A firm's long-run dividend-to-earnings ratio. The firm's policy is to attempt to pay out a
certain percentage of earnings, but it pays a stated dollar dividend and adjusts it to the target as base-line
increases in earnings occur.


Temporal method

Under this currency translation method, the choice of exchange rate depends on the
underlying method of valuation. Assets and liabilities valued at historical cost (market cost) are translated at
the historical (current market) rate.


Without

If 70 were bid in the market and there was no offer, the quote would be "70 bid without." The
expression "without" indicates a one-way market.


Without recourse

Without the lender having any right to seek payment or seize assets in the event of
nonpayment from anyone other than the party (such as a special-purpose entity) specified in the debt contract.


Workout

Informal arrangement between a borrower and creditors.


Workout period

Realignment period of a temporary misaligned yield relationship that sometimes occurs in
fixed income markets.


FIFO (First In, First Out)

An inventory valuation method that presumes that the first units received were the first ones
sold.


INVENTORY TURNOVER

The number of times a company sold out and replaced its average stock of goods in a year. The formula is:
(Cost of goods sold) / (Average inventory (beginning inventory + ending)/2 )


LIFO (Last In, First Out)

An inventory valuation method that presumes that the last units received were the first ones
sold.


MERCHANDISE INVENTORY

The value of the products that a retailing or wholesaling company intends to resell for a profit.
In a manufacturing business, inventories would include finished goods, goods in process, raw materials, and parts and components that will go into the end product.


Inventory

Goods bought or manufactured for resale but as yet unsold, comprising raw materials, work-in-progress and finished goods.


Routing

A list of all the labour or machining processes and times required to convert raw materials into finished goods or to deliver a service.


Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.


Direct method

A method of preparing the operating section of the Statement of Cash Flows that uses the company’s actual cash inflows and cash outflows.


Direct write-off method

A method of adjusting accounts receivable to the amount that is expected to be collected by eliminating the account balances of specific nonpaying customers.


First-in, first-out (FIFO)

A method of accounting for inventory.


Indirect method

A method of preparing the operating section of the Statement of Cash Flows that does not use the company’s actual cash inflows and cash outflows, but instead arrives at the net cash flow by taking net income and adjusting it for noncash expenses and the changes from last year in the current assets and current liabilities.


Inventory

The cost of the goods that a company has available for resale.


Last-in, first-out (LILO)

A method of accounting for inventory.


Outstanding shares

The number of shares that are in the hands of the public. The difference between issued shares and outstanding shares is the shares held as treasury stock.


Periodic inventory system

An inventory system in which the balance in the inventory account is adjusted for the units sold only at the end of the period.


Perpetual inventory system

An inventory system in which the balance in the inventory account is adjusted for the units sold each time a sale is made.


dividend payout ratio

Computed by dividing cash dividends for the year
by the net income for the year. It’s simply the percent of net income distributed
as cash dividends for the year.


inventory shrinkage

A term describing the loss of products from inventory
due to shoplifting by customers, employee theft, damaged and
spoiled products that are thrown away, and errors in recording the purchase
and sale of products. A business should make a physical count and
inspection of its inventory to determine this loss.


inventory turnover ratio

The cost-of-goods-sold expense for a given
period (usually one year) divided by the cost of inventories. The ratio
depends on how long products are held in stock on average before they
are sold. Managers should closely monitor this ratio.


inventory write-down

Refers to making an entry, usually at the close of a
period, to decrease the cost value of the inventories asset account in
order to recognize the lost value of products that cannot be sold at their
normal markups or will be sold below cost. A business compares the
recorded cost of products held in inventory against the sales value of the
products. Based on the lower-of-cost-or-market rule, an entry is made to
record the inventory write-down as an expense.


Inventory Turnover Ratio

Provides a measure of how often a company's inventory is sold or
"turned over" during a period. It is calculated by dividing the sales
figure for the period by the book value of the inventory at the end of
the period.


algebraic method

a process of service department cost allocation
that considers all interrelationships of the departments
and reflects these relationships in simultaneous
equations


direct method

a service department cost allocation approach
that assigns service department costs directly to revenueproducing
areas with only one set of intermediate cost
pools or allocations


dividend growth method

a method of computing the cost
of common stock equity that indicates the rate of return
that common shareholders expect to earn in the form of
dividends on a company’s common stock


dollar days (of inventory)

a measurement of the value of inventory for the time that inventory is held


FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs


high-low method

a technique used to determine the fixed
and variable portions of a mixed cost; it uses only the highest
and lowest levels of activity within the relevant range


input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource


judgmental method (of risk adjustment)

an informal method of adjusting for risk that allows the decision maker
to use logic and reason to decide whether a project provides
an acceptable rate of return


method of least squares

see least squares regression analysis


method of neglect

a method of treating spoiled units in the
equivalent units schedule as if those units did not occur;
it is used for continuous normal spoilage


modified FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per
equivalent unit but, in transferring units from a department,
the costs of the beginning inventory units and the
units started and completed are combined and averaged


net present value method

a process that uses the discounted
cash flows of a project to determine whether the
rate of return on that project is equal to, higher than, or
lower than the desired rate of return


outlier

an abnormal or nonrepresentative point within a data set


out-of-pocket cost

a cost that is a current or near-current cash expenditure


outsourcing

the use, by one company, of an external
provider of a service or manufacturer of a component


outsourcing decision

see make-or-buy decision


risk-adjusted discount rate method

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk


 

 

 

 

 

 

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