As its name implies, the last-in, first-out assigns, to goods sold, the cost of those goods that have been purchased last. Hence, the stock-in-hand (ending inventory) is valued at earlier cost. It is based on the assumption that, irrespective of actual physical flow of goods, the goods-sold are those that have acquired last and the goods that remain unsold (ending inventory) are those that have been acquired first. So cost of goods sold is based on the price of recently purchased goods and ending inventory represents the cost of earlier purchases. The designation, LIFO, it may be noted, refers only to the cost-flow of the units sold which may not correspond with physical movement of the goods. It should be noted that in applying LIFO, there will be significant difference in the cost of goods sold as well as in the ending inventory, if a firm follows periodic as against perpetual method of inventory valuation, provided that the ending inventory never drops below the number of units in the beginning inventory. This would not be known unless perpetual inventory records are kept. The doubtful assumption weakens the logic of LIFO when periodic inventory system is used.

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