FIFO vs LIFO: Which Inventory Method Should You Use?

The short answer: FIFO (first in, first out) assumes you sell your oldest stock first; LIFO (last in, first out) assumes you sell your newest stock first. The choice mainly affects how your cost of goods sold and remaining stock value are calculated when purchase prices change over time.

What each method means

FIFO — the first units you bought are the first ones counted as sold. Remaining stock is valued at your most recent prices.
LIFO — the most recently bought units are counted as sold first. Remaining stock is valued at older prices.

A simple example

Imagine you buy 10 units at 100 each, then later 10 more at 120 each, and then sell 10. Under FIFO, those 10 sold are valued at 100 each (the oldest), so cost of goods sold is 1,000 and your remaining stock is the newer 120 units. Under LIFO, the 10 sold are valued at 120 each (the newest), so cost of goods sold is 1,200 and remaining stock is valued at 100. Same shelf, different reported cost and profit.

Which should you use?

For most retailers, FIFO is the natural fit: it matches how you physically sell (oldest stock first, especially for anything perishable or with expiry), and it keeps your stock valued at current prices. LIFO is used in some markets for tax reasons but is disallowed under certain accounting standards, so it’s less common for small shops. When unsure, FIFO is the safe, intuitive default — but confirm with your accountant for your country’s rules.

Beyond FIFO and LIFO: average cost

Many systems use weighted average cost, which values stock at the average price paid. It smooths out price swings and is simple to run automatically — which is why it’s a popular default in inventory software.

Let software handle the maths

You shouldn’t track cost layers by hand. RushFlow values stock and cost of goods sold automatically so your profit reflects real costs, not estimates. See the live demo, or learn gross vs net profit.

Frequently asked questions

What is the difference between FIFO and LIFO?

FIFO (first in, first out) treats your oldest stock as sold first; LIFO (last in, first out) treats your newest stock as sold first. The difference changes your cost of goods sold and stock value when prices change.

Which is better, FIFO or LIFO?

For most retailers FIFO is the better fit — it matches how goods are physically sold, suits perishables, and values remaining stock at current prices. LIFO is less common and disallowed under some accounting standards.

What is weighted average cost?

It values inventory at the average price you paid across purchases, smoothing out price changes. Many inventory systems use it as a simple, automatic default.

Does the inventory method affect my profit?

Yes. When purchase prices change, FIFO and LIFO report different costs of goods sold, which changes reported gross profit for the period even though the physical stock is identical.