FIFO vs LIFO: Differences, Examples & How to Choose

FIFO vs LIFO: Quick Definition

FIFO (First In, First Out) assumes the oldest inventory sells first. LIFO (Last In, First Out) assumes the newest inventory sells first. Both are accounting assumptions about cost flow—they don’t have to match how goods physically move on your shelves. Both are inventory valuation methods, and the choice reshapes your financial statements.

Not sure which method fits your business? GOIS applies FIFO or LIFO automatically and shows the impact on your live COGS. Request a demo

How FIFO Works

Under FIFO, you assign the cost of your earliest purchases to the goods you sell first.

Example: You buy 100 units at $10, then 100 at $14, and sell 120. FIFO sells the $10 units first: COGS = (100 × $10) + (20 × $14) = $1,280. Your remaining 80 units are valued at the newer $14 cost.

How LIFO Works

Under LIFO, you assign the cost of your most recent purchases to the goods you sell first.

Example: Same purchases, same 120 units sold. LIFO sells the $14 units first: COGS = (100 × $14) + (20 × $10) = $1,600. Your remaining 80 units are valued at the older $10 cost.

FIFO vs LIFO: Side-by-Side

	FIFO	LIFO
Sells first	Oldest stock	Newest stock
COGS (rising prices)	Lower	Higher
Reported profit	Higher	Lower
Taxes (rising prices)	Higher	Lower
Ending inventory value	Near current cost	Older, lower cost
IFRS allowed?	Yes	No

Impact on COGS, Profit, and Taxes

When prices rise, FIFO records cheaper old costs as COGS—so profit and taxes are higher, but your balance-sheet inventory reflects near-current value. LIFO records expensive recent costs as COGS—so profit and taxes are lower, but ending inventory looks understated. In stable prices, the two methods converge.

Where Weighted Average Cost Fits

Between the two sits weighted average cost (WAC), which blends all unit costs into one average. In the example above, WAC gives COGS of $1,440—right between FIFO’s $1,280 and LIFO’s $1,600. It’s the simplest option when items are interchangeable.

A Note on FEFO for Perishables

If you sell perishable or dated stock, you’ll also hear about FEFO (First Expired, First Out)—a physical picking rule that ships the nearest-expiry items first. FEFO governs movement to reduce spoilage, while FIFO/LIFO govern cost accounting. Businesses often run FEFO in the warehouse and FIFO in the books.

Accounting Rules: GAAP vs IFRS

US GAAP permits both FIFO and LIFO. IFRS bans LIFO because it can distort inventory values. Companies using LIFO must also track a “LIFO reserve” to reconcile with FIFO. If you report internationally, LIFO isn’t an option.

Which Method Should You Choose?

• Choose FIFO if you sell perishable or fast-moving goods, report under IFRS, or want a balance sheet that reflects current inventory value. It’s the most common choice worldwide.
• Choose LIFO only if you’re US-only and want to reduce taxable income during inflation—accepting the added complexity and lower reported profit.

How Inventory Software Handles FIFO and LIFO

Applying a cost-flow method by hand across constant purchases and sales is where errors creep in. A cloud inventory management system applies FIFO or LIFO automatically to every transaction, tracks costs through serial and batch tracking, and reports live COGS and margins in reporting and analytics. GOIS handles this for 2,400+ businesses across 20+ countries.

Stop calculating cost flow by hand. GOIS applies your chosen method automatically and keeps COGS accurate in real time. Request a demo

Key Takeaways

• FIFO sells oldest stock first; LIFO sells newest first.
• In rising prices, FIFO = higher profit/taxes; LIFO = lower profit/taxes.
• IFRS bans LIFO; FIFO is the global default.
• FEFO is a physical picking rule, separate from FIFO/LIFO accounting.

Frequently Asked Questions

Is FIFO or LIFO better?
FIFO suits most businesses and is accepted globally. LIFO only makes sense for US-only companies seeking tax deferral in inflationary periods.

Why is LIFO banned under IFRS?
Because it can understate inventory value and be used to manipulate reported earnings.

What’s the difference between FIFO and FEFO?
FIFO is a cost-accounting assumption; FEFO is a physical rule to ship nearest-expiry items first, used for perishables.

Conclusion

FIFO vs LIFO comes down to how you want costs, profit, and taxes to flow through your books—and what reporting rules bind you. FIFO is the safer, globally accepted default; LIFO is a US-only tax play with trade-offs. Whichever you pick, apply it consistently and let software keep the numbers exact.