LIFO is legal in the United States under GAAP (Generally Accepted Accounting Principles). However, it's prohibited under IFRS (International Financial Reporting Standards), which means companies reporting internationally or in most countries outside the U.S. cannot use LIFO. About 20-30% of large U.S. companies use LIFO.

FinanceApril 12, 2026

FIFO vs LIFO: Which Inventory Method Is Right for Your Business?

Q: What is the difference between FIFO and LIFO?

FIFO (First In, First Out) assumes the oldest inventory is sold first. LIFO (Last In, First Out) assumes the newest inventory is sold first. During rising prices, FIFO produces higher profits and higher inventory values, while LIFO produces lower profits (and lower taxes) with lower inventory values on the balance sheet.

Q: Which method is better for taxes: FIFO or LIFO?

During inflation (rising prices), LIFO is better for taxes because it assigns higher recent costs to COGS, reducing taxable income. FIFO results in higher reported profits and higher tax bills. However, LIFO is only allowed under U.S. GAAP — it's prohibited under IFRS, which most countries outside the U.S. follow.

Q: Which inventory method do most companies use?

FIFO is the most widely used method globally because it's accepted under both GAAP and IFRS, matches the physical flow of most goods, and is simpler to implement. In the U.S., industries like oil and gas, automotive, and retail often use LIFO for its tax advantages. Technology and perishable goods companies almost always use FIFO.

Q: Can you switch between FIFO and LIFO?

Yes, but switching requires IRS approval (Form 3115) and can trigger significant tax adjustments. Switching from LIFO to FIFO typically creates a taxable income increase because the LIFO reserve gets recognized. The IRS allows spreading this adjustment over four years. Companies should consult a tax advisor before changing methods.

By The hakaru Team·Last updated March 2026

Quick Answer

*FIFO (First In, First Out) — oldest inventory sold first. Higher profits on paper, higher taxes. Used by most companies globally.
*LIFO (Last In, First Out) — newest inventory sold first. Lower reported profits, lower taxes during inflation. U.S. only (banned under IFRS).
*During rising prices, LIFO saves real tax dollars while FIFO shows better-looking financials.

Feature	FIFO	LIFO
Assumes Sold First	Oldest inventory	Newest inventory
COGS During Inflation	Lower (older, cheaper costs)	Higher (newer, pricier costs)
Reported Profit	Higher	Lower
Tax Bill	Higher	Lower
GAAP Allowed	Yes	Yes
IFRS Allowed	Yes	No

Inventory Turnover Calculator →

What Is FIFO?

FIFO stands for First In, First Out. It assumes the first units purchased are the first units sold. If you bought 100 widgets at $10 in January and 100 more at $12 in March, selling 100 units would cost $10 each under FIFO — the older, cheaper batch goes first.

This matches how most businesses actually move physical inventory. Grocery stores rotate stock so older items sell first. Manufacturers use older raw materials before newer ones. FIFO reflects this natural flow and is the most intuitive method.

What Is LIFO?

LIFO stands for Last In, First Out. It assumes the most recently purchased inventory is sold first. Using the same example — 100 widgets at $10 then 100 at $12 — selling 100 units under LIFO costs $12 each, the newer batch.

LIFO rarely matches physical inventory flow (you wouldn’t sell fresh milk before old milk). It’s an accounting choice, not an operational one. Companies use LIFO primarily for tax benefits during inflationary periods.

Key Differences: A Real Example

A retailer purchases inventory in three batches during the year:

Batch	Units	Cost per Unit	Total Cost
January	200	$20	$4,000
June	200	$24	$4,800
October	200	$28	$5,600

They sell 400 units at $40 each ($16,000 revenue). Here’s the impact:

Metric	FIFO	LIFO
COGS	$8,800 (200@$20 + 200@$24)	$10,400 (200@$28 + 200@$24)
Gross Profit	$7,200	$5,600
Tax (21% corp rate)	$1,512	$1,176
After-Tax Profit	$5,688	$4,424

LIFO saves $336 in taxes on this one transaction. Scale that across millions of units and years of inflation, and the savings are substantial.

When to Use FIFO

Perishable goods. Food, pharmaceuticals, and anything with expiration dates should use FIFO — it matches actual physical flow.
International reporting. IFRS prohibits LIFO, so any company reporting internationally must use FIFO (or weighted average).
Seeking investment. FIFO shows higher profits, making financials more attractive to investors and lenders.
Deflating costs. When input prices are falling, FIFO actually produces higher COGS and lower taxes than LIFO.

When to Use LIFO

Tax minimization during inflation. LIFO’s primary advantage — lower taxable income when costs are rising.
Industries with rising input costs. Oil and gas, automotive parts, and manufacturing often benefit from LIFO.
U.S.-only companies. If you don’t report under IFRS, LIFO remains an option.
Cash flow priority. Lower taxes mean more cash stays in the business, even if reported profits look smaller.

Which Is Better? Depends on Your Goals

FIFO is better for showing strong financial performance — higher profits, higher inventory values, more attractive to investors. LIFO is better for minimizing taxes and keeping cash in the business during inflationary periods. Many U.S. companies use LIFO for tax returns and disclose a “LIFO reserve” so analysts can convert to FIFO for comparison purposes.

If you operate internationally or plan to, FIFO is your only option. If you’re a U.S.-only business in an industry with rising costs, LIFO’s tax savings can be worth the accounting complexity.

Analyze your inventory efficiency

Use our free Inventory Turnover Calculator →

Disclaimer: This guide is for educational purposes only and does not constitute accounting or tax advice. Inventory method changes have tax implications. Consult a CPA or tax professional before changing your accounting method.

Frequently Asked Questions

What is the difference between FIFO and LIFO?

FIFO assumes oldest inventory sells first; LIFO assumes newest sells first. During rising prices, FIFO shows higher profits and LIFO shows lower profits (and lower taxes). FIFO is accepted globally; LIFO is U.S.-only under GAAP.

Which method is better for taxes: FIFO or LIFO?

During inflation, LIFO produces lower taxable income by assigning higher recent costs to COGS. FIFO results in higher reported profits and bigger tax bills. But LIFO is only available under U.S. GAAP.

Is LIFO legal?

Legal in the U.S. under GAAP. Prohibited under IFRS, which most countries outside the U.S. follow. About 20-30% of large U.S. companies use LIFO.

Which inventory method do most companies use?

FIFO is most common globally because it works under both GAAP and IFRS, matches physical flow of goods, and is simpler. Oil and gas, automotive, and heavy manufacturing in the U.S. often use LIFO for tax advantages.

Can you switch between FIFO and LIFO?

Yes, but it requires IRS approval via Form 3115. Switching from LIFO to FIFO triggers a taxable income increase from the LIFO reserve, spread over four years. Consult a tax professional before switching.