Note that the cost of goods sold on the income statement and the inventory on the balance sheet add up to $950 which is the amount Uncle Joe paid for his inventory. Regardless of what cost flow method you use, the total amount spent should equal the cost of goods sold + ending inventory. Remember all you are doing is simply allocating your costs between an expense (cost of goods sold) and asset (inventory).

The above example, assumes a deflationary environments where the price of inventory declined. In a inflationary environment, the impact of using LIFO versus FIFO is reversed.