When using LIFO, how are costs defined for the most recent purchases vs. older inventory?

When a company uses the Last-In, First-Out (LIFO) inventory valuation method, it assumes that the most recently purchased inventory items are the first to be sold. This means that when calculating the cost of goods sold (COGS), the costs assigned will reflect the newer inventory prices. Consequently, the older inventory costs will remain on the balance sheet as the value of the inventory that has not yet been sold.

Therefore, the correct understanding is that for items sold, the company records the newer costs associated with the recently acquired inventory (reflecting current market prices), while the remaining inventory is valued based on the older cost figures. This approach can significantly impact financial statements during periods of inflation, as it can lead to lower taxable income since COGS will be higher than under other inventory valuation methods, such as FIFO (First-In, First-Out).