FIFO vs LIFO: Differences, Example, and Which to Use

FIFO and LIFO are two methods for valuing the inventory you sell — and the choice changes your reported cost of goods sold, profit, and tax. This guide explains both in plain terms, shows a worked example, and helps you decide which to use.

What is FIFO?

FIFO (first in, first out) assumes the first items you bought are the first you sell. Your cost of goods sold uses your oldest costs, and the inventory left on the books is valued at your most recent costs. FIFO mirrors how most businesses physically move stock — especially perishables.

What is LIFO?

LIFO (last in, first out) assumes the most recently bought items are the first you sell. Your cost of goods sold uses your newest costs, and remaining inventory is valued at older costs. Note: LIFO is allowed under US GAAP but not permitted under IFRS, so it is unavailable in many countries.

FIFO vs LIFO at a glance

	FIFO	LIFO
Sells first	Oldest stock	Newest stock
COGS uses	Oldest costs	Newest costs
In rising prices	Lower COGS, higher profit & tax	Higher COGS, lower profit & tax
Allowed under IFRS?	Yes	No

A worked example

Say you buy 10 units at $10, then 10 more at $14, and sell 10 units.

FIFO: you sell the first 10 (at $10) — COGS = $100. Remaining inventory (the $14 units) = $140.
LIFO: you sell the last 10 (at $14) — COGS = $140. Remaining inventory (the $10 units) = $100.

Same purchases, same sale — but LIFO reports higher cost and lower profit when prices are rising.

Which should you use?

For most retailers, FIFO is the natural choice: it matches how you sell (oldest first), values leftover stock at current costs, and is accepted everywhere. LIFO is mainly used in the US to reduce taxable profit when prices rise. If you handle perishables or dated goods, FIFO is effectively required in practice. Whichever you pick, apply it consistently — and make sure your costs, including landed cost, are accurate.

Value inventory accurately

RushFlow tracks the cost of goods on every sale so your cost of goods sold and inventory value stay accurate — giving you a true gross profit without manual costing.

Frequently asked questions

What is the difference between FIFO and LIFO?

FIFO (first in, first out) sells your oldest stock first; LIFO (last in, first out) sells your newest stock first. The choice changes your cost of goods sold, profit and tax.

Which is better, FIFO or LIFO?

For most retailers FIFO is better — it matches how stock actually moves, values leftover inventory at current cost, and is accepted worldwide. LIFO is mainly a US tax strategy.

Is LIFO allowed under IFRS?

No. LIFO is prohibited under IFRS, so it cannot be used in the many countries that follow IFRS. It is permitted under US GAAP.

How does FIFO affect profit?

When prices are rising, FIFO uses older, lower costs for COGS, which reports higher profit — and therefore higher tax — than LIFO.

Which method is best for perishable goods?

FIFO. Selling the oldest stock first matches how perishables must be handled, so FIFO is effectively required in practice for dated goods.

Can I switch between FIFO and LIFO?

Accounting rules require you to apply an inventory method consistently. Switching is possible but regulated and must be disclosed, so get professional advice first.

Does FIFO or LIFO change how I physically store stock?

They are accounting assumptions, not storage rules — but good practice (especially for perishables) is to physically rotate oldest stock to the front, which matches FIFO.

FIFO vs LIFO: Which Inventory Method Should You Use?