In the LIFO accounting method, what assumption is made about inventory sales?

In the LIFO (Last In, First Out) accounting method, the assumption made about inventory sales is that the last items purchased are the first sold. This means that when a sale occurs, the most recently acquired inventory items are the ones that are recorded as sold, while the older inventory remains on the shelves.

This method is significant in accounting for inventory and cost of goods sold, especially in times of rising prices. By assuming that the latest items are sold first, businesses can match current costs against revenues, which can lead to tax benefits due to potentially lower taxable income. The costs associated with these last-purchased items are higher in a period of inflation, thus reducing taxable profit.

In contrast, other methods, like FIFO (First In, First Out), would assume that the oldest inventory items are sold first, affecting the financial statements and the evaluation of business performance in different ways.