FIFO (first in, first out) assumes your oldest inventory sells first, so older costs go into cost of goods sold (COGS). LIFO (last in, first out) assumes your newest inventory sells first, so the latest costs hit COGS. When prices rise, FIFO shows higher profit (and higher taxes), while LIFO shows lower profit (and lower taxes).
In retail, manufacturing, and wholesale, solid profits come from closely managed inventory. (Shocking, we know.)
FIFO and LIFO are two of the most common ways to value inventory. Pick one and it shapes your COGS, profit, and tax bill.
Here, we'll walk through FIFO vs. LIFO with real numbers, cover the tax and accounting rules, and help you decide which method fits your business.
FIFO stands for first in, first out. It's a method of inventory management and valuation in which goods produced or bought first are sold, used, or disposed of first. In other words, goods sell in the order they arrived.
For reporting, FIFO assumes the oldest costs go into COGS on your income statement, and newer goods stay in inventory. So when you sell a product using FIFO, its cost is the cost of your older goods. FIFO is one of the most popular inventory accounting methods.
Pros of FIFO:
Cons of FIFO:
| Calculating FIFO profits |
| Profit = Selling price - Cost of oldest inventory |
With FIFO, you subtract your oldest purchase cost from the selling price to get reported profit. Let's put real numbers on it.
Say you buy 100 units at $10, then another 100 units at $12. You sell 150 units at $20 each, for $3,000 in revenue.
Under FIFO, the first 100 units sold carry the $10 cost ($1,000), and the next 50 carry the $12 cost ($600). That's $1,600 in COGS, $600 of ending inventory (50 units at $12), and $1,400 in gross profit.
It's the same math behind the basic cost of goods formula. If you track COGS in a perpetual inventory system, it simply happens with every sale.
LIFO stands for last in, first out. It's a method of inventory management and valuation in which the goods produced or bought most recently are recorded as sold first. In other words, the cost of your newest products goes into COGS, while the cost of older goods stays in inventory.
Some US businesses choose LIFO when their costs keep rising, because matching the newest (higher) costs to current sales lowers reported profit and taxable income. US tax law lets you elect LIFO, as long as you play by its rules.
That matching is LIFO's big appeal. Your income statement reflects what inventory costs you right now.
Pros of LIFO:
Cons of LIFO:
| Calculating LIFO profits |
| Profit = Selling price - Cost of newest inventory |
With LIFO, you subtract your most recent purchase cost from the selling price to get reported profit. When costs are rising, that lowers your reported profit.
Let's use the same numbers. The first 100 units sold carry the newest $12 cost ($1,200), and the next 50 carry the $10 cost ($500). That's $1,700 in COGS, $500 of ending inventory (50 units at $10), and $1,300 in gross profit.
Here's how FIFO and LIFO stack up on the exact same sale:
| Buy 100 units at $10, then 100 at $12. Sell 150 at $20. | FIFO | LIFO |
|---|---|---|
| Revenue (150 units at $20) | $3,000 | $3,000 |
| COGS | $1,600 (100 at $10 + 50 at $12) | $1,700 (100 at $12 + 50 at $10) |
| Ending inventory (50 units) | $600 (50 at $12) | $500 (50 at $10) |
| Gross profit | $1,400 | $1,300 |
Same products, same sale, $100 difference in profit. Scale that across thousands of units and the gap gets real.
FIFO and LIFO are the methods companies use to classify inventory and calculate profit. Your profit affects your income taxes and is a key measure of performance. Each method yields different profits, so it pays to know which one makes sense for you.
| FIFO | LIFO | |
|---|---|---|
| Meaning | Assumes the oldest products in inventory sell first | Assumes the last item purchased is the first one sold |
| Restrictions | No restrictions under GAAP or IFRS | Not allowed under IFRS |
| Recordkeeping | Simpler | More complex (track LIFO layers) |
| Impact when prices rise | Lower COGS and higher net profit | Higher COGS and lower net profit |
| Ending inventory value when prices rise | Closer to current costs | Can be badly outdated |
| Tax impact when prices rise | Higher taxes | Lower taxes |
| Matches physical flow | Usually yes | Usually no |
| Best for | Perishables, global sellers, most SMBs | US businesses with steadily rising costs |
If your ending inventory value drifts far from what your stock is worth today, it may be time to read up on inventory revaluation.
Different industries get different mileage out of FIFO and LIFO, depending on what they sell and how their stock moves. Here's how each method lines up with real-world businesses.
FIFO is a natural fit if you sell perishables or anything with an expiration date. Think:
Selling goods with expiry dates? FEFO (first expired, first out) takes FIFO a step further by moving whatever expires soonest first. It's a staple for food and beverage businesses.
LIFO suits industries with durable, non-perishable inventory, where matching the latest costs matters most. Examples include:
Knowing how your industry tends to play it helps you pick the method that best supports your goals.
In general, FIFO is the safer bet because both GAAP and IFRS allow it. LIFO can still pay off if you're a US business and your costs keep climbing. To decide, look at how your inventory costs are changing.
How fast your stock moves matters too. A high inventory turnover ratio means cost layers don't linger, so the FIFO vs. LIFO gap shrinks. Your priorities may also shift as you grow, so it's worth revisiting your choice as your business changes.
When prices rise, LIFO puts your newest, highest costs into COGS. Higher COGS means lower reported profit, and lower reported profit means lower taxable income. FIFO does the opposite, so you'll typically pay more tax in the short term.
There's a catch. Under the LIFO conformity requirement, using LIFO on your tax return means using it in reports to shareholders, partners, and lenders too. You elect LIFO by filing Form 970 with the IRS.
So, does the IRS require FIFO or LIFO? Neither. According to IRS Publication 538, you need a method that clearly reflects your income, and you need to use it consistently from year to year.
Want to change methods later? That's a change in accounting method, which generally needs IRS consent through Form 3115. Tax rules get specific fast, so loop in your accountant before you switch (and check out our tax season tips for SMBs).
Inventory is the materials and goods that make up the products a company sells. Managing it well helps you track spending and value for tax and internal purposes. Generally speaking, inventory falls into three stages:
Your accounting team may assign value to inventory and classify it as a company asset, since inventory can turn into cash soon. To value your company accurately, all your assets may need to be assessed.
At the beginning and end of the fiscal year, you should perform an inventory valuation. For valuation purposes, you must:
GAAP is the standard set of accounting principles issued by the Financial Accounting Standards Board (FASB). GAAP allows both FIFO and LIFO. However, the International Financial Reporting Standards (IFRS) don't allow LIFO.
When your company records income and expenses, there are two methods:
Holding inventory doesn't automatically lock you into accrual accounting. Per IRS Publication 538, small businesses that meet the gross receipts test can generally use the cash method. Either way, following inventory control best practices keeps your numbers trustworthy.
Generally Accepted Accounting Principles set the standards for accounting procedures in the United States. Under GAAP, both FIFO and LIFO are allowed.
However, IFRS standards issued by the International Accounting Standards Board (IASB) don't permit use of the LIFO method. Under IAS 2, you'd use FIFO or weighted average cost instead.
Outside the US, most countries follow IASB rules. That's why US-based companies using LIFO for local financial statements often use FIFO for overseas operations.
Thinking about LIFO? You'll need to file Form 970 with the IRS to elect it. Once you're on LIFO, US tax law expects you to stay on it unless the IRS approves a change.
FIFO and LIFO get most of the attention in inventory valuation chats. But you might also consider alternatives like weighted average cost and specific identification to better fit your needs.
This approach calculates the average cost of goods available for sale and applies it evenly to inventory sold and remaining stock. It's especially useful for:
This method assigns specific costs to individual items in inventory, making it ideal for:
By comparing these approaches, you can find the method that most accurately represents your inventory and financial performance.
Knowing how FIFO vs. LIFO works helps you choose the best inventory management techniques for your business and make the most of tax benefits. Both methods have pros and cons, so pick the one that suits you. If you operate internationally, FIFO is usually the way to go, since IFRS doesn't allow LIFO.
So where do we come in? Cin7 Core's costing methods include FIFO, FIFO by batch or serial number, FEFO by batch or serial number, and special (specific) batch or serial costing. Every sale pulls the right cost into COGS, no spreadsheet gymnastics required.
Our inventory and order management software supports better accounting and brings all your sales channels into one cloud-based platform. Cin7 products keep your sales channels, warehouse, and accounting software on the same page.
We integrate natively with QuickBooks Online and Xero, so your COGS lands in your books without retyping a thing.
Take Klein River Cheese, a family-owned artisan cheesemaker in South Africa that's been making cheese for more than two decades. It sells in person, through direct-to-consumer e-commerce, and B2B. With food safety and compliance on the line, the team needed accurate expiry date tracking across individual items and full batches.
With Cin7 Core, Klein River assigns manufacture and expiry dates, so the status of entire product lines is visible with minimal effort. Cin7 also syncs with Xero for accounting and with WooCommerce.
"From a food safety point of view, having data at the click of a button when it comes to your ingredients; your traceability; where your product is; when it leaves your facility; where it's being consumed, is critical," says manager Raymond Siebrits.
Ditch the spreadsheets and stop manual data entry. Start a free trial to see how Cin7's inventory and order management system helps you reach new markets!
Looking for more on LIFO and FIFO? Here are our answers to your top questions.
For most businesses, FIFO. It's allowed under both GAAP and IFRS, it matches how stock usually moves, and your ending inventory reflects recent costs. LIFO can make sense if you're a US business with steadily rising costs and you want lower taxable income.
FIFO matches the way most businesses physically move stock: oldest first. It's accepted under both GAAP and IFRS, keeps ending inventory close to current costs, and makes for simpler records.
When your costs are rising, LIFO usually lowers your taxable income because your newest, priciest costs go into COGS. FIFO does the opposite. But LIFO isn't allowed under IFRS, you elect it with Form 970, and the conformity rule means using LIFO in your financial statements too.
No. IAS 2 doesn't permit LIFO. Under IFRS, you'd use FIFO or weighted average cost, or specific identification for items that aren't interchangeable.
FIFO expenses your oldest costs first, and LIFO expenses your newest costs first. Weighted average cost blends everything into one average cost for both sold and remaining stock. In our example, that's $11 per unit ($2,200 for 200 units), so COGS lands at $1,650, right between FIFO and LIFO.
Yes, but it's not a quick toggle. Switching is a change in accounting method, which generally needs IRS consent through Form 3115. US tax law expects you to stay on LIFO unless the IRS approves the change, so talk to your accountant first.
Yes! LIFO is allowed under US GAAP and US tax law. You elect it by filing Form 970 with your tax return. Just remember the LIFO conformity rule: if you use LIFO for taxes, you'll need to use it in your financial reports too.
For starters, IFRS doesn't allow it, so it's off the table if you report under those standards. In the US, the conformity rule means lower taxable profits also show up in the reports your lenders and investors see. LIFO also takes more recordkeeping, and it rarely matches how stock actually moves through your warehouse.
They're raw materials, work in progress (WIP), finished goods, and MRO (maintenance, repair, and operations) supplies. You can dig into each one in our guide to inventory classification. Your valuation method matters across all of them, since raw material costs flow through WIP into the finished goods you sell.
FIFO goes by receipt date, so the first stock in is the first stock out. FEFO (first expired, first out) goes by expiry date instead, so whatever expires soonest gets picked and costed first. That makes FEFO a smart choice for food, beverage, and health and beauty products, where nobody wants a surprise on the shelf. In Cin7 Core, you can use FEFO costing by batch or serial number, and those products need an expiry date.