What is the effect on inventory under the LIFO method when prices are declining?

When using the LIFO (Last-In, First-Out) inventory method, the most recent costs are recorded as the costs of goods sold, while older costs remain in inventory. In a scenario where prices are declining, the cost of the newer inventory will be lower than that of the older inventory. As a result, when the most recent lower-cost items are sold, the cost associated with those sales will be lower, suggesting that older inventory—which was purchased at a higher cost—will remain in the balance sheet.

Consequently, since the inventory on hand will reflect these older, higher costs, the overall value of the inventory will actually see an increase compared to what it would have been if the newer, lower costs were used. This increase in inventory value arises from the fact that the remaining inventory consists of goods purchased at higher prices before the decline. Thus, in a declining price environment under the LIFO method, one can expect an increase in the inventory value recorded on the balance sheet.