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FIFO vs. LIFO: What is the difference?

By Marshall Hargrave
Published on June 30, 2025

First in, first out (FIFO) assumes the business sells the oldest items first, leading to lower cost of goods sold (COGS), higher net income, higher ending inventory value during inflation, and increased tax liabilities. 

Last in, last out (LIFO) assumes the newest items are sold first, resulting in higher COGS, lower net income, and lower ending inventory value during inflation, which can reduce tax liabilities.


Inventory is often the most significant asset on the balance sheet. If you operate a retailer or wholesale business, inventory may require a large investment, and you need to carefully track the inventory balance. Managing inventory requires the owner to assign a value to each inventory item, and the two most common accounting methods are FIFO and LIFO.

The average cost is a third accounting method that calculates inventory cost as the total cost of inventory divided by the total units purchased. Most businesses use either FIFO or LIFO, and sole proprietors typically use average cost. Accounting standards allow companies to use all three methods.

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What is first in, first out (FIFO)?

FIFO (first in, first out) is an inventory costing method where the oldest inventory items are assumed to be sold first. This means that the cost of goods sold (COGS) on your income statement reflects the cost of your oldest inventory, while your remaining inventory on the balance sheet reflects the cost of your newest items. 

FIFO is the most common inventory valuation method, and it's often preferred because it aligns with the natural flow of goods in many businesses. According to the IRS, FIFO is an acceptable method for valuing inventory for tax purposes as long as it's consistently applied. 

This inventory method is often used in industries dealing with perishable goods, such as food and beverage. FIFO naturally aligns with the physical flow of these goods, where it's crucial to move older stock before it spoils, becomes outdated, or loses significant value.

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What is last in, last out (LIFO)?

LIFO (Last In, First Out) is an accounting method used for inventory valuation, where the most recently acquired items are assumed to be sold or used first. Under LIFO, the cost of the latest inventory purchased is the first to be recorded as the cost of goods sold (COGS), leaving older inventory as ending stock. 

This method is often used during periods of inflation, as it results in higher COGS and lower taxable income, but it may not reflect the actual physical flow of inventory. LIFO is permitted under US Generally Accepted Accounting Principles (GAAP) but not allowed under International Financial Reporting Standards (IFRS).

Before diving into the inventory valuation methods, you first need to review the inventory formula. The components of the formula are used to calculate FIFO and LIFO accounting values.

Understanding the inventory formula

The value of inventory is determined using the ending inventory formula:

Beginning Inventory + Purchases = Goods Available for Sale - Cost of Goods Sold (COGS) = Ending Inventory

Let’s assume that a sporting goods store begins the month of April with 50 baseball gloves in inventory and purchases an additional 200 gloves. 

Goods available for sale totals 250 gloves, and the gloves are either sold (added to cost of goods sold) or remain in ending inventory. If the retailer sells 120 gloves in April, ending inventory is (250 goods available for sale - 120 cost of goods sold), or 130 gloves.

As you review the FIFO and LIFO inventory systems below, consider that goods available for sale end up in one of two places: cost of goods sold or ending inventory.

FIFO and LIFO produce a different cost per unit sold, and the difference impacts both the balance sheet (inventory account) and the income statement (cost of goods sold).


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While this formula tracks inventory flow based on records, perform regular physical inventory counts to ensure accuracy. This verifies the formula's accuracy and uncovers the hidden costs of shrinkage (theft, damage, obsolescence) that purchase and sales data alone cannot reveal.


How are FIFO and LIFO methods different?

FIFO and LIFO inventory valuations differ because each method makes a different assumption about the units sold. To understand FIFO vs. LIFO flow of inventory, you need to visualize inventory items sitting on the shelf, each with a cost assigned to it.

Inflation is the overall increase in prices over time, and this discussion assumes that inventory items purchased first are less expensive than more recent purchases. Since the economy has some level of inflation in most years, prices increase from one year to the next.

The difference between FIFO and LIFO costs is due to timing. When all inventory items are sold, the total cost of goods sold is the same, regardless of the valuation method you choose in a particular accounting period.

Here are the critical differences between FIFO and LIFO:

Using FIFO for inventory valuation

FIFO assumes that the oldest items purchased are the first items sold, and older inventory items are less expensive than recent purchases. Using FIFO generates these results:

  • Cost of goods sold: Selling the older (cheaper) units first generates a lower cost of goods sold than LIFO.
  • Ending inventory: The newer, more expensive units remain in ending inventory, which is a higher balance than the LIFO method.
  • Net income (profit): The lower cost of goods sold balance means that the FIFO method generates a higher profit than LIFO.

When you sell the newer, more expensive items first, the financial impact is different, which you can see in our calculations of FIFO & LIFO later in this post.


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Beyond taxes, FIFO's higher reported net income during inflation can positively influence investor perceptions and potentially make meeting profit-based loan covenants easier.   


Inventory valuation using LIFO

LIFO assumes that the most recent inventory items are sold first, which are the most expensive. The financial results using LIFO are:

  • Cost of goods sold: Selling the more expensive units first generates a higher cost of goods sold than FIFO.
  • Ending inventory: The older, less expensive units remain in ending inventory, which is a lower balance than the FIFO method.
  • Net income (profit): The higher cost of goods sold balance means the LIFO method generates a smaller profit than FIFO.

In sum, using the LIFO method generally results in a higher cost of goods sold and a smaller net profit on the balance sheet. When all of the units of goods available are sold, the total cost of goods sold is the same, using any inventory valuation method.

Assume that the sporting goods store sells 250 baseball gloves in goods available for sale. All costs are posted to the cost of goods sold account, and the ending inventory has a zero balance. It no longer matters when a particular item is posted to the cost of goods sold account since all of the items are sold.


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Companies using LIFO must disclose the "LIFO reserve" (the difference between LIFO and FIFO inventory values), which allows analysts to adjust financials for better comparison with FIFO-using firms.   


To solidify your understanding of these concepts, let’s review a simple example of the calculations.

How do you calculate FIFO and LIFO?

Example of calculating FIFO and LIFO:

To explain inventory valuation in detail, assume that Sterling Fashions sells a line of men’s shirts and that the store had no beginning inventory balance on March 1st. Here is the inventory activity for March:

  • March 5: Purchased 100 units at $50 per for $5,000
  • March 15: Purchased 150 units at $54 per for $8,100
  • March 25: Sold 120 units 
  • March 31: Ending inventory of 130 units at a total value of $13,100

The store purchased 250 shirts for a total cost of $13,100 and sold 120 shirts, leaving 130 in ending inventory. A company’s bookkeeping tracks the total cost of inventory items, as well as the units bought and sold. Let's calculate the cost of goods sold (COGS) and ending inventory using both methods.

An infographic comparing FIFO and LIFO methods

Calculating FIFO

FIFO assumes the first units purchased are the first ones sold. Here’s how to calculate inventory using FIFO: 

1. Calculate cost of goods sold (COGS): Since 120 units were sold, we assume the first 100 units purchased ($50 each) were sold, plus 20 units from the second purchase ($54 each).

  • (100 shirts x $50/shirt) = $5,000
  • (20 shirts x $54/shirt) = $1,080
  • Total FIFO COGS = $5,000 + $1,080 = $6,080

2. Calculate ending inventory: The remaining 130 shirts (250 total - 120 sold) are assumed to be from the most recent purchase.

  • (130 shirts x $54/shirt) = $7,020 (ending inventory value)  

Notice how FIFO's higher ending inventory ($7,020) during inflation can improve balance sheet ratios like the current ratio (Current Assets / Current Liabilities), potentially enhancing perceived liquidity.

Calculating LIFO 

LIFO assumes the last units purchased are the first ones sold.

1. Calculate Cost of Goods Sold (COGS): Since 120 units were sold, we assume they all came from the most recent purchase of 150 units ($54 each).

  • (120 shirts x $54/shirt) = $6,480 (Total LIFO COGS)  

2. Calculate ending inventory: The remaining 130 shirts consist of the entire first batch (100 units) and the leftover units from the second batch (150 purchased - 120 sold = 30 units).

  • (100 shirts x $50/shirt) = $5,000
  • (30 shirts x $54/shirt) = $1,620  
  • Total LIFO ending inventory = $5,000 + $1,620 = $6,620

Notice that while COGS and ending inventory values differ, the total cost ($13,100) is fully allocated under both methods.

Inventory values when all units are sold

When all 250 units are eventually sold, the entire inventory cost ($13,100) is posted to the cost of goods sold, regardless of the method used during intermediate periods. 

Let’s assume that Sterling sells all of the units at $80 per unit, for a total revenue of $20,000. The total gross profit ($20,000 revenue - $13,100 cost of goods sold) is $6,900, regardless of whether FIFO or LIFO is used to value inventory on a month-to-month basis.

The timing difference is key. 

FIFO tends to report higher profits earlier during inflation (selling cheaper goods first), while LIFO reports lower profits earlier (selling expensive goods first). 

These timing differences eventually reverse as all inventory is sold. FIFO is generally the more straightforward method for ongoing tracking.

FIFO is the more straightforward method to use, and most businesses stick with the FIFO method.

How FIFO and LIFO impact your financial statements

Since FIFO assumes that the oldest inventory is sold first, it will impact your income statement and balance sheet as follows:

Income statement shows lower COGS

The cost of goods sold (COGS) reflects the cost of the oldest inventory, resulting in a lower COGS and a higher gross profit during periods of rising prices.

Balance sheet shows higher inventory value

Inventory is valued based on the cost of the newest items, leading to a higher inventory value on the balance sheet.

LIFO, on the other hand, assumes that you sold the newest inventory first. Your income statement and balance sheet will reflect the numbers this way: 

Income statement shows higher COGS

COGS reflects the cost of the newest inventory, resulting in a higher COGS and a lower gross profit during periods of rising prices.

Balance sheet shows lower inventory value

Inventory is valued based on the cost of the oldest items, leading to a lower inventory value on the balance sheet.

It's important to note that these effects are reversed in periods of falling prices, where LIFO would result in lower COGS and higher inventory values compared to FIFO. This reversal occurs because in a deflationary environment, the newest inventory (used first in LIFO) is less expensive than older inventory.

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FIFO and LIFO pros and cons

Choosing between FIFO and LIFO involves weighing their respective advantages and disadvantages. Let's look at each method individually.

FIFO pros

FIFO offers several benefits that make it a popular choice for many businesses:

  • Intuitive and matches physical flow: FIFO aligns with how many businesses naturally manage inventory, selling the oldest items first.
  • Higher profits during inflation: It leads to a lower cost of goods sold (COGS) and higher net income when prices are rising.
  • Higher inventory value: This method results in a higher value of inventory on the balance sheet, which can be beneficial for some financial ratios.
  • Globally accepted: FIFO is allowed under Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS).  

However, FIFO also presents some drawbacks, particularly concerning taxes during inflation.

FIFO cons

Consider these potential downsides before deciding on FIFO:

  • Higher taxes during inflation: Higher profits mean a greater tax liability.
  • May overstate income: Can overstate income in the short term, especially during periods of rapid inflation.

This potential for higher taxes and a less conservative income figure leads some businesses to consider LIFO. Evaluating these aspects helps determine if FIFO aligns with your financial goals.

LIFO pros

LIFO's primary benefits often relate to taxes and cost matching during periods of rising prices:

  • Lower taxes during inflation: Higher COGS leads to lower taxable income.
  • More accurate matching of costs and revenues: Matches current costs with current revenues, which can provide a more realistic picture of profitability during inflation.

Despite these benefits, LIFO has significant limitations and complexities.

LIFO cons

The drawbacks of LIFO often relate to regulatory acceptance, financial reporting effects, and complexity:

  • Not allowed under IFRS: LIFO is prohibited under International Financial Reporting Standards (IFRS), limiting its use for companies that report under IFRS.
  • Lower net income: Using LIFO results in lower net income during periods of inflation, which can negatively impact some financial ratios.
  • Can understate inventory value: LIFO leads to a lower inventory value on the balance sheet.
  • Less intuitive: This method doesn't always align with the actual inventory flow in many businesses.
  • More difficult to manage: In general, LIFO is more challenging than FIFO to manage due to recordkeeping complexity. 

FIFO and LIFO pros and cons

The FIFO and LIFO methods each have pros and cons. Let’s break them down:

FIFO Pros

  • Intuitive and matches physical flow: FIFO aligns with how many businesses naturally manage inventory, selling the oldest items first.
  • Higher profits during inflation: It leads to a lower cost of goods sold (COGS) and higher net income when prices are rising.
  • Higher inventory value: This method results in a higher value of inventory on the balance sheet, which can be beneficial for some financial ratios.
  • Globally accepted: FIFO is allowed under Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS).  

FIFO Cons

  • Higher taxes during inflation: Higher profits mean a greater tax liability.
  • May overstate income: Can overstate income in the short term, especially during periods of rapid inflation.

LIFO Pros

  • Lower taxes during inflation: Higher COGS leads to lower taxable income.
  • More accurate matching of costs and revenues: Matches current costs with current revenues, which can provide a more realistic picture of profitability during inflation.

LIFO Cons

  • Not allowed under IFRS: LIFO is prohibited under International Financial Reporting Standards (IFRS), limiting its use for companies that report under IFRS.
  • Lower net income: Using LIFO results in lower net income during periods of inflation, which can negatively impact some financial ratios.
  • Can understate inventory value: LIFO leads to a lower inventory value on the balance sheet.
  • Less intuitive: This method doesn't always align with the actual inventory flow in many businesses.
  • More difficult to manage: In general, LIFO is more challenging than FIFO to manage due to recordkeeping complexity. 

Keep in mind the pros and cons of FIFO and LIFO depend on a business's specific situation, industry, and economic conditions. 

How do FIFO and LIFO affect more straightforward accounting operations?

Using FIFO simplifies the accounting process because the oldest items in inventory are assumed to be sold first. When Sterling uses FIFO, all of the $50 units are sold first, followed by the items at $54.

Let’s expand the example and assume that the store-bought items at five different prices, rather than two. Here are the prices in order: $50, $54, $55.60, $57, $58.25. FIFO still assumes that the $50 items are sold first.

LIFO is more difficult to account for because the newest units purchased are constantly changing. In the example above, LIFO assumes that the $54 units are sold first. However, if there are five purchases, the first units sold are at $58.25.

The LIFO method requires advanced accounting software and is more difficult to track. Keep your accounting simple by using the FIFO method. You’ll spend less time on inventory accounting, and your financial statements will be easier to produce and understand.

The Sterling example computes inventory valuation for a retailer, and this accounting process also applies to manufacturers and wholesalers (distributors). The costs included for manufacturers, however, are different from the costs for retailers and wholesalers. 

You also need to understand the regulatory and tax issues related to inventory valuation. FIFO is the more straightforward method to use, and most businesses stick with the FIFO method.

How does inflation affect FIFO and LIFO?  

Inflation, the general rise in prices, highlights the core difference between FIFO and LIFO. 

How Inflation affects FIFO:

As inventory costs increase, FIFO assigns the older, lower costs to COGS. This inflates reported profit because the cost matched against revenue is less than the current replacement cost of the inventory sold. The result is lower COGS, higher profit, higher taxes, and a higher inventory value on the balance sheet (reflecting recent costs).

How Inflation affects LIFO:

LIFO, however, assigns the newer, higher costs to COGS. This provides a better match between the current cost of inventory and current revenue, often seen as a more realistic measure of profit generated from ongoing operations during inflation. The result is higher COGS, lower profit, lower taxes, and a lower inventory value on the balance sheet (reflecting old costs).

Essentially, during inflation, LIFO gives a more current reflection of costs on the income statement, while FIFO gives a more current value for inventory on the balance sheet. The opposite occurs during deflation.

Industry, regulatory, and tax considerations

There are certain industry, regulatory, and tax considerations to keep in mind when deciding which inventory valuation method to use. 

FIFO and LIFO industry considerations

Deciding whether to use FIFO or LIFO involves assessing several complex factors, one of which is the industry. 

Accountants use “inventoriable costs” to define all expenses required to obtain inventory and prepare the items for sale. For retailers and wholesalers, the largest inventoriable cost is the purchase cost.

On the other hand, manufacturers create products and must account for the material, labor, and overhead costs incurred to produce the units and store them in inventory for resale.


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Industries using LIFO, especially manufacturing, must monitor inventory levels closely to avoid LIFO liquidation, where dipping into very old inventory layers can trigger an unexpectedly large tax liability due to low historical costs flowing to COGS.


FIFO and LIFO regulatory factors

You should also know that Generally Accepted Accounting Principles (GAAP) allow businesses to use FIFO or LIFO methods. However, International Financial Reporting Standards (IFRS) permits firms to use FIFO, but not LIFO. Check with your CPA to determine which regulations apply to your business.

How LIFO and FIFO affect tax liabilities

The inventory method you choose may impact your income tax liability. To explain, assume that Sterling sells 300 shirts on December 31.

The FIFO and LIFO methods compute different cost of goods sold balances, and the amount of profit will be different on December 31. As a result, the annual profit on shirt sales will be different, along with the income tax liability. Again, these are short-term differences that are eliminated when all of the shirts are sold.

FIFO is the easiest method to use, regardless of industry, and this inventory valuation method complies with GAAP and IFRS. Use the FIFO method for your inventory transactions.

Accounting for inventory is essential—and proper inventory management helps you increase profits, leverage technology to work more productively, and reduce the risk of error.


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Remember the US LIFO Conformity Rule: If you elect to use LIFO for federal income tax purposes to achieve tax savings, the IRS generally requires you to also use LIFO for your main financial reports to shareholders and creditors.


Streamline your accounting and save time

The FIFO and LIFO methods impact your inventory costs, profit, and tax liability. Keep your accounting simple by using the FIFO method of accounting, and discuss your company’s regulatory and tax issues with a CPA.

Use accounting software to account for inventory using less time and with more accuracy. QuickBooks allows you to use several inventory costing methods, and you can print reports to see the impact of labor, freight, insurance, and other costs. With QuickBooks, you’ll know how much your inventory is worth so you can make real-time business decisions.

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