FIFO and LIFO Inventory Methods
Inventory costing methods that determine which unit costs flow to cost of goods sold: FIFO assumes oldest units sell first, LIFO assumes newest units sell first.
What is FIFO vs LIFO?
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are inventory cost flow assumptions that determine how the cost of inventory is allocated between cost of goods sold (COGS) and ending inventory on the balance sheet. Under FIFO, the oldest (first purchased) inventory costs are matched to current sales, leaving newer, often higher-cost units in ending inventory. Under LIFO, the most recently purchased inventory costs are matched to current sales. During periods of rising prices, FIFO results in lower COGS, higher gross profit, and higher taxes; LIFO produces higher COGS, lower gross profit, and a tax advantage. LIFO is permitted under GAAP but prohibited under IFRS — a key difference between US and international financial reporting.
Example
A retailer purchases 100 units at $10 in January and 100 units at $12 in February, then sells 100 units. Under FIFO, COGS is 100 × $10 = $1,000 (oldest costs used first), leaving $1,200 in ending inventory. Under LIFO, COGS is 100 × $12 = $1,200 (newest costs used first), leaving $1,000 in ending inventory. With $1,500 in sales revenue, FIFO yields a gross profit of $500 while LIFO yields $300. LIFO's lower reported profit translates into lower income taxes — explaining why many US companies prefer LIFO during inflationary periods.
Source: FASB — ASC 330: Inventory