When using the LIFO method under a perpetual inventory system, the latest units purchased before a sale are allocated to:

Understanding LIFO in Inventory Systems

When using the Last-In, First-Out (LIFO) method in an inventory system, the essential principle is that the last units added to inventory are the first units to be sold. This methodology is particularly important in accounting as it impacts the cost of goods sold (COGS) and taxable income.

1. Inventory Flow: Under LIFO, when a sale occurs, the inventory that has most recently been purchased is sold first.
2. Cost Allocation: This means that the costs associated with the latest purchased goods are transferred to COGS for the sale. Thus, any remaining inventory will be based on older purchases.
3. Impact on Financial Statements: The use of LIFO can result in a lower taxable income during periods of inflation because the higher costs of newer inventory are recognized first, reducing profits on paper.

Conclusion

Therefore, in summary, when using the LIFO method under a perpetual inventory system, the latest units purchased before a sale are allocated to Cost of Goods Sold (COGS), affecting both inventory valuation and financial reporting.