What is the characteristic of LIFO inventory management?

LIFO, or Last In, First Out, is an inventory management method where the most recent items added to inventory are the first to be sold. This approach assumes that the latest units purchased or produced are the ones that leave the inventory first when a sale occurs.

In an environment of rising prices, using LIFO can have significant tax advantages. The cost of goods sold (COGS) will reflect higher costs associated with the most recently purchased items, which can reduce taxable income. Practically, this means that the ending inventory on the balance sheet will consist of the older, less costly items, leading to a lower COGS and thus potentially higher profits on paper.

While the other methods mentioned do have their own characteristics—like FIFO (First In, First Out) where the oldest items are sold first, or averaging where costs are spread out across all items—these do not describe the LIFO methodology accurately. Hence, LIFO's defining trait is indeed the sale of the most recent inventory first.