What is the costing method where the last goods purchased are the first goods sold?

The costing method where the last goods purchased are the first goods sold is known as Last In, First Out (LIFO). This method operates on the principle that the most recently acquired inventory items are the ones to be sold first. Thus, during periods of rising prices, LIFO typically results in higher cost of goods sold (COGS) and lower ending inventory valuations, which can affect a company’s financial statements.

Using LIFO can be beneficial for tax purposes in certain circumstances because it reduces taxable income in inflationary environments, as the more expensive, recent inventory is recognized in COGS, leaving less expensive inventory on the books. This method is particularly advantageous for companies that deal with perishable goods or products with a short shelf life, as it mimics inventory flows.

While other methods like First In, First Out (FIFO) or Average Costing follow different principles – where older costs are matched against revenues or where costs are averaged out respectively – they do not reflect the concept of selling the newest inventory first, which is the defining characteristic of LIFO. Specific Identification addresses individual items rather than groups or batches, making it distinct from LIFO as well.