Each industry is different in determining costs of goods sold or cost of services rendered. Retail uses two distinct methods to calculate costs of goods sold. The first is called ‘Specific Identification’ whereby each item sold is specifically identified to its recorded cost. The second method is referred to as ‘Inventory Adjustment’ format. In this method, a beginning and ending balance is recorded along with the purchases throughout the year.
LIFO is a variation of inventory adjustment whereby the ending inventory is valued based on older purchase rates for the respective products. It is generally more conservative in nature as the ending inventory is worth more in value per unit due to inflation or market trends, i.e. the ending inventory value is less than fair market value. This variation keeps the Cost of Goods Sold at a higher dollar value than the other variations.