Last in, first out accounting refers to the valuation method in which a small business sells or uses its most recently bought or produced inventory first.For example, you have a small business that sells widgets. In your inventory, you have three widgets that you bought six months ago for $10 each and three identical widgets that you bought a day ago for $15 each. When a customer buys four widgets from you for $20 each, LIFO accounting assumes that three of the widgets come from the second batch and one widget comes from the first batch. Your gross margin of selling the four widgets is $20 x 4 – $15 x 3 – $10 x 1 = $25.During inflation, LIFO accounting often lowers net income, as costs of inventory tend to increase. The Canada Revenue Agency and International Financial Reporting Standards dont allow LIFO to be used for inventory valuation.