Final answer:
The Last-in, first-out (LIFO) cost assumption is a method used in inventory management and accounting. It assumes that the cost of the total quantity sold or issued during a given period comes from the most recent purchases.
Step-by-step explanation:
The Last-in, first-out (LIFO) cost assumption is a method used in inventory management and accounting. It assumes that the cost of the total quantity sold or issued during a given period comes from the most recent purchases. This means that the most recently acquired inventory is the first to be sold or used, while older inventory remains in stock.
For example, let's say a company sells 100 units of a product in a month, and it acquires inventory at various prices throughout that same month. Under the LIFO assumption, the cost of the 100 units sold will be based on the most recent purchases made in that month.
LIFO is often used in situations where the cost of inventory has been increasing over time. By matching the higher recent costs with the revenue generated from sales, LIFO can result in a lower taxable income for the company.