Question 1

What is the difference between FIFO and LIFO?

Accepted Answer

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.

Question 2

What is FIFO inventory method?

Accepted Answer

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.

Question 3

What is LIFO inventory method?

Accepted Answer

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.

Question 4

Which is better: FIFO or LIFO?

Accepted Answer

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.

Question 5

Is LIFO legal?

Accepted Answer

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.

Question 6

Which method do most businesses use?

Accepted Answer

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).

Question 7

What is the weighted average method?

Accepted Answer

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.

Question 8

How does inflation affect FIFO vs LIFO?

Accepted Answer

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.

Purchase	Units	Cost/Unit	Total
January (oldest)	100	$10	$1,000
March	100	$12	$1,200
June (newest)	100	$15	$1,500
Total Available	300	-	$3,700

Factor	FIFO	LIFO
COGS during inflation	Lower (older costs)	Higher (newer costs)
Reported profits (inflation)	Higher	Lower
Tax liability (inflation)	Higher	Lower
Ending inventory value	Higher (newer costs)	Lower (older costs)
IFRS allowed?	Yes	No
US GAAP allowed?	Yes	Yes
Matches physical flow	Usually yes	Rarely

FIFO vs LIFO

FIFO

LIFO

Example: How They Differ

FIFO (oldest first)

LIFO (newest first)

FIFO vs LIFO Comparison

When to Use Each Method

Use FIFO When:

Use LIFO When:

Track inventory costs with StockZip

Related terms

Cost of Goods Sold

Inventory Turnover

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