FIFO vs LIFO

FIFO

First In, First Out

The oldest inventory costs are assigned to Cost of Goods Sold first. Ending inventory reflects the most recent (often higher) costs.

Think of it like: A grocery store shelf where older products are sold before newer ones.

LIFO

Last In, First Out

The newest inventory costs are assigned to Cost of Goods Sold first. Ending inventory reflects the oldest (often lower) costs.

Think of it like: A stack of plates where you take from the top (newest) first.

Example: How They Differ

Imagine you purchased inventory at different prices:

• January (oldest): 100 units, $10/unit, $1,000 total

• March: 100 units, $12/unit, $1,200 total

• June (newest): 100 units, $15/unit, $1,500 total

• Total Available: 300 units, $3,700 total

If you sold 150 units:

• FIFO (oldest first): 100 units @ $10 = $1,000; 50 units @ $12 = $600; COGS = $1,600. Remaining inventory: 150 units @ $13.40 avg = $2,100

• LIFO (newest first): 100 units @ $15 = $1,500; 50 units @ $12 = $600; COGS = $2,100. Remaining inventory: 150 units @ $10.67 avg = $1,600

In this inflationary example, LIFO shows $500 higher COGS and $500 lower profits/taxes.

FIFO vs LIFO Comparison

• COGS during inflation — FIFO: Lower (older costs); LIFO: Higher (newer costs)

• Reported profits (inflation) — FIFO: Higher; LIFO: Lower

• Tax liability (inflation) — FIFO: Higher; LIFO: Lower

• Ending inventory value — FIFO: Higher (newer costs); LIFO: Lower (older costs)

• IFRS allowed? — FIFO: Yes; LIFO: No

• US GAAP allowed? — FIFO: Yes; LIFO: Yes

• Matches physical flow — FIFO: Usually yes; LIFO: Rarely

When to Use Each Method

Use FIFO When:

• You have perishable goods

• You report under IFRS

• You want to show higher profits for investors

• Inventory costs are relatively stable

• You want simpler, more intuitive tracking

Use LIFO When:

• You are in the US and use GAAP

• You want to reduce tax liability during inflation

• You have non-perishable goods

• Inventory costs are rising consistently

• You prioritize cash flow over reported profits

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Frequently asked questions

What is the difference between FIFO and LIFO?

FIFO (First In, First Out) assumes oldest inventory is sold first. LIFO (Last In, First Out) assumes newest inventory is sold first. They affect which costs are assigned to COGS and ending inventory.

What is FIFO inventory method?

FIFO assigns the cost of the oldest inventory to Cost of Goods Sold. Remaining inventory reflects newer, often higher costs. This typically results in higher ending inventory value and higher reported profits during inflation.

What is LIFO inventory method?

LIFO assigns the cost of the newest inventory to Cost of Goods Sold. During inflation, this results in higher COGS, lower profits, and lower taxes. However, ending inventory shows older, often understated costs.

Which is better: FIFO or LIFO?

It depends on your goals. FIFO shows higher profits and is required for IFRS reporting. LIFO reduces taxes during inflation but is only allowed under US GAAP. Most small businesses and international companies use FIFO.

Is LIFO legal?

LIFO is permitted under US GAAP but prohibited under IFRS (International Financial Reporting Standards). Most countries outside the US require FIFO or weighted average methods.

Which method do most businesses use?

FIFO is the most common method globally because it is simpler, allowed under all accounting standards, and matches the physical flow of most inventory (especially perishables).

What is the weighted average method?

Weighted average calculates COGS using the average cost of all inventory available during the period. It smooths out price fluctuations and is simpler than tracking specific costs.

How does inflation affect FIFO vs LIFO?

During inflation, FIFO results in lower COGS (older, cheaper costs) and higher profits/taxes. LIFO results in higher COGS (newer, higher costs) and lower profits/taxes. The opposite occurs during deflation.