Key Takeaway: FIFO and LIFO answer the same question differently: when you sell a unit, which purchase cost do you count as the cost of that sale?
What's on This Page
The Definitions
- FIFO (First In, First Out): the oldest inventory cost is used first when calculating cost of goods sold
- LIFO (Last In, First Out): the most recently purchased inventory cost is used first
Example
You bought 100 units at $10, then 100 more at $12. You sell 100 units.
Physical Stock Rotation vs. Accounting Method
It's worth separating two related but different things: physically rotating stock so older items sell first (important for expiry-sensitive goods, covered in our medical store case study) is a shelving practice. FIFO/LIFO as described here is a cost-accounting method for calculating COGS. You can physically rotate stock FIFO while still using either accounting method.
Which One Should You Use?
Most retail and eCommerce businesses use FIFO. It matches physical stock rotation practice, and in many countries LIFO isn't permitted for tax reporting at all. LIFO is more common in industries with rising costs where it reduces reported taxable profit, but check your local accounting rules before choosing.
For further reading, see the IFRS Foundation's IAS 2 Inventories standard.
Checklist
- Confirm which costing method your accountant currently uses
- Check whether physical stock rotation actually follows FIFO on the shelf
- Verify local tax rules on whether LIFO is even permitted
- Calculate COGS under both methods for a sample product to see the difference
- Review whether rising or falling costs make one method more favorable
- Confirm the chosen method is applied consistently across all inventory
Common Mistakes
FAQ
Which method do most small businesses actually use?
FIFO is by far the most common, partly because it matches physical stock rotation and partly because many countries don't permit LIFO for tax reporting at all.
Does the accounting method affect physical shelving?
Not directly. Physically rotating stock oldest-first is a shelving practice that businesses can follow regardless of which costing method they use for accounting.
Why would a business choose LIFO?
In periods of rising costs, LIFO can reduce reported taxable profit, since it assumes the most recently purchased (higher-cost) stock is sold first.
Is FIFO required for expiry-sensitive products?
Physical FIFO rotation is strongly recommended for expiry-sensitive goods regardless of the accounting method chosen, to avoid stock expiring on the shelf.
Calculate This For Your Business
Related Guides in the Inventory Academy
- Inventory Management Guide. the bigger picture this cost method fits into
- Stock Reconciliation Guide. keeping the underlying quantities accurate regardless of costing method
- 10 Signs You've Outgrown Excel for Inventory. another guide in the Inventory Academy