FIFO vs. LIFO: Examples and when to use each (2026)

Introduction

FIFO and LIFO are two assumptions about which inventory costs leave your books first when you make a sale. FIFO expenses your oldest costs first, and LIFO your newest. On the same sales, in a period of rising prices, that one choice changes your reported profit, your ending inventory value, and your tax bill, which makes it a financial decision, not a warehouse one.

This page compares the two with worked examples on identical numbers, the tax and compliance reality (including why LIFO is US-only), and a way to decide.

FIFO vs. LIFO: A quick comparison table 

The two methods only diverge when your costs move. When purchase prices are flat, FIFO and LIFO produce the same numbers.

FIFO defined 

FIFO stands for first in, first out. It assumes the oldest inventory in your warehouse or store is the first to be sold. So when you work out COGS, you use the price you paid for your oldest stock first, then move to newer batches as the older ones run out.

This is how most businesses handle physical goods, especially anything perishable. A grocery store doesn't sell this week's milk before last week's. That's why FIFO is the default for most retailers, food businesses, and ecommerce sellers.

LIFO defined 

LIFO stands for last in, first out. It assumes the opposite of FIFO. The most recently purchased inventory is sold first, while older stock stays on the books longer.

LIFO mainly suits industries where inventory doesn't physically expire or degrade, like lumber, coal, or auto parts. In those businesses it doesn't matter which physical unit ships first, because LIFO is only an assumption about cost, not about which items leave the warehouse. Even so, it stays uncommon; only about 7% of US public companies that carry inventory use it.

Worked example: FIFO 

Say you buy the same product in three batches as your cost rises, then sell 150 units for $25 each ($3,750 in revenue)

Under FIFO, the 150 units sold are your oldest: the 100 from January and 50 from February.

COGS is (100 x $10) + (50 x $12) = $1,600.

The 150 units left are valued at recent costs: (50 x $12) + (100 x $14) = $2,000.

Gross profit is $3,750 - $1,600 = $2,150.

Worked example: LIFO 

Take the identical batches and the identical sale. Under LIFO, the 150 units sold are your newest: the 100 from March and 50 from February.

COGS is (100 x $14) + (50 x $12) = $2,000.

The 150 units left are valued at the oldest costs: (100 x $10) + (50 x $12) = $1,600.

Gross profit is $3,750 - $2,000 = $1,750.

The two methods on the same sale:

It is the same stock and the same sale, yet LIFO reports $400 less profit; in a period of rising prices that gap is what becomes a lower tax bill.

Tax impact of FIFO vs. LIFO 

The tax difference comes straight out of that $400 profit gap. LIFO's higher COGS lowers taxable income, so in a period of rising prices it defers tax and frees up cash. At an illustrative 25% rate, the $400 of lower profit above is roughly $100 less tax in that period; FIFO runs the other way: higher reported profit, more tax now, and financials that read as stronger to a lender or investor.

Two things travel with the LIFO tax benefit. The LIFO reserve is the gap between what your inventory would be worth under FIFO and its lower LIFO value; you report it, and it measures the tax you have deferred. The LIFO conformity rule means that if you use LIFO for tax, you must use it in the financial statements you show shareholders, so you cannot bank the tax saving while reporting the higher FIFO profit.

GAAP vs. IFRS treatment 

The biggest constraint on the choice is the accounting standard you report under.

LIFO is a US-specific option. IFRS, used across most of the world, bans it, on the view that it can understate inventory and distort profit. If you report under IFRS or expect to raise capital or expand into markets that require it, LIFO is off the table, and the choice is FIFO or weighted average.

Industry decision tree 

A few questions settle most cases.

• Do your goods perish or have a date (food, pharma, fashion, tech)? FIFO, so the oldest stock moves first; FEFO (first expired, first out) is the expiration-date version of the same idea.
   

• Do you report under IFRS or operate internationally? FIFO or weighted average. LIFO is not allowed.
   

• Costs are rising, goods are non-perishable (fuel, metals, building materials), and you want to defer US tax? LIFO is worth modeling with your accountant.
   

• None of the above? FIFO is the simpler, widely accepted default.

How to switch methods (IRS form 970) 

In the US, FIFO is the default and needs no election. To adopt LIFO, you have to file IRS form 970, "Application to Use LIFO Inventory Method," with your tax return for the first year you use it. Three things to know first:

• The election is effectively irrevocable. Once on LIFO, you stay on it unless the IRS consents to a change.

• Switching later uses a different form. You file form 3115, "Application for Change in Accounting Method."

• The conformity rule applies. LIFO for tax means LIFO in the financial statements you report to shareholders.

Since it locks you in and ties your books to your tax method, adopting LIFO is a decision to make with your accountant.