What Is This FIFO, and LIFO?

What is this FIFO, and LIFO?

12 May, 2025 | 4 Minutes

FIFO and LIFO are two fundamental inventory valuation methods that impact financial reporting, taxes, and profitability. This guide explains how FIFO prioritizes older stock while LIFO uses newer inventory first and why it matters.

Discover the key differences between these methods, how they affect cost of goods sold (COGS), and which approach works best for your business. Whether you’re managing perishable goods, navigating inflation, or optimizing accounting strategies, mastering FIFO and LIFO ensures better inventory control and financial decision-making.

FIFO (First In, First Out)

FIFO, which stands for First In, First Out, is an inventory management method where the oldest stock (first items purchased or produced) is sold or used first. This approach ensures that inventory is rotated in the order it was received, reducing the risk of spoilage or obsolescence, especially for perishable goods.

In accounting, FIFO assumes that the cost of the earliest acquired items is assigned to the cost of goods sold (COGS), while the remaining inventory is valued at the most recent purchase prices. This method often results in higher reported profits during inflation since older, cheaper inventory costs are matched against current revenues.

LIFO (Last In, First Out)

LIFO, or Last In, First Out, is the opposite of FIFO. Under this method, the most recently acquired inventory is sold first, while older stock remains in storage. LIFO is commonly used in industries where inventory is non-perishable and prices fluctuate frequently.

From an accounting perspective, LIFO assigns the most recent (and often higher) costs to COGS, leaving older, lower-cost inventory on the balance sheet. This can lead to lower taxable income in times of rising prices, as higher expenses reduce reported profits.

How are FIFO and LIFO methods different?

The key differences between FIFO and LIFO include:

Inventory Flow – FIFO sells oldest inventory first, while LIFO sells newest inventory first.
Financial Impact
- FIFO typically shows higher net income during inflation (due to lower COGS).
- LIFO reduces taxable income in rising price environments (due to higher COGS).
Tax Implications – LIFO can defer taxes when prices rise, whereas FIFO may result in higher tax liabilities.
Inventory Valuation – FIFO leaves newer, higher-cost inventory on the balance sheet, while LIFO retains older, lower-cost inventory.

Inventory valuation for FIFO and LIFO

The choice between FIFO and LIFO affects how businesses value their inventory and report financial performance:

FIFO Valuation:

COGS = Cost of oldest inventory
Ending inventory = Cost of newest purchases
Better reflects current market prices for remaining stock

LIFO Valuation:

COGS = Cost of most recent inventory
Ending inventory = Cost of oldest stock
Can understate inventory value on the balance sheet over time

While FIFO is widely accepted under International Financial Reporting Standards (IFRS), LIFO is only permitted under U.S. Generally Accepted Accounting Principles (GAAP). Businesses must choose the method that aligns with their operational needs and financial strategy.