LIFO (last in, first out).
In plain English
LIFO, last in first out, charges cost of goods sold using the most recently purchased inventory, leaving the oldest and usually cheapest costs sitting in the ending inventory balance. When prices rise, that raises COGS, lowers reported profit, and lowers taxable income, which is why some U.S. companies choose it. The tradeoff is a balance sheet carrying inventory at stale prices, sometimes decades old, a gap disclosed in the footnotes as the LIFO reserve. U.S. tax rules require a company using LIFO on its tax return to use it in its financial statements as well. IFRS does not permit LIFO, so it is a United States specific choice.
01Why it matters
A LIFO company and a FIFO company with identical operations will report different profit and different inventory value, so comparing them without adjusting for the method compares the bookkeeping, not the business.
02The math, step by step
Say a shop buys 100 units at 10 dollars, then 100 units at 14 dollars, and sells 120 units. LIFO charges 100 units at 14 dollars plus 20 units at 10 dollars, so COGS is 1,600 dollars, versus 1,280 dollars under FIFO. The 320 dollar difference lowers reported profit and taxable income.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
These are not two names for the same calculation. In a period of rising prices LIFO produces higher COGS, lower profit, and understated inventory, while FIFO does the reverse. The LIFO reserve in the footnotes is the number that converts one to the other.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice