LIFO and FIFO

LIFO and FIFO are two different accounting methods for deciding which cost to assign to inventory as it is sold. FIFO, first in first out, assumes the oldest inventory in stock is sold first. LIFO, last in first out, assumes the newest inventory is sold first.

The choice matters because it affects reported cost of goods sold and, in turn, gross profit, especially when input costs are changing. During a period of rising costs, LIFO tends to report higher cost of goods sold and lower profit than FIFO, since it assumes the most recently purchased, more expensive inventory is what got sold. IFRS does not permit LIFO, while it remains allowed under US accounting rules, which is worth knowing when comparing companies that report under different standards.