What is FIFO vs. LIFO?
Two ways to decide which inventory costs flow to COGS first - with real effects on profit and tax.
FIFO vs. LIFO: definition
When prices change, the order in which inventory costs flow to cost of goods sold matters. FIFO expenses the oldest (usually cheaper, in inflation) costs first, leaving newer costs in ending inventory - producing higher profit and higher inventory value. LIFO expenses the newest (usually higher) costs first, producing lower profit and lower tax, but older costs pile up in inventory. LIFO is permitted under US GAAP but not under IFRS.
| Effect | FIFO | LIFO |
|---|---|---|
| COGS | Lower (older, cheaper costs) | Higher (newer, costlier costs) |
| Reported profit | Higher | Lower |
| Ending inventory value | Higher (newer costs) | Lower (older costs) |
| Income tax | Higher | Lower |
| Allowed under IFRS | Yes | No |
How Fintra handles it
Fintra supports standard inventory costing methods and applies your chosen method consistently so cost of goods sold and inventory value follow the same rule every period. Because purchases and sales are on one model, switching scenarios in planning shows how a method affects margin and tax before you commit - though the accounting method choice should be confirmed with your accountant.
- Chosen costing method applied consistently to COGS and inventory
- Method effect on margin and tax visible in planning scenarios
- Inventory valuation ties to the general ledger automatically
Worked example
Frequently asked questions
Which is better, FIFO or LIFO?
Neither is universally better. FIFO reports higher profit and inventory value and is accepted worldwide. LIFO lowers taxable income in periods of rising prices but is banned under IFRS and can leave outdated inventory costs on the books. The right choice depends on prices, tax goals, and jurisdiction.
Why is LIFO not allowed under IFRS?
IFRS prohibits LIFO because it can distort the balance sheet, leaving very old costs in inventory that no longer reflect current value, and because it can be used primarily to reduce tax rather than reflect actual flow. US GAAP still permits it.
How do FIFO and LIFO affect taxes?
In rising-price environments, LIFO assigns higher costs to COGS, lowering taxable income and tax now - a deferral benefit. FIFO assigns lower costs, raising taxable income and tax. When prices fall, the effects reverse.
Can a business switch between FIFO and LIFO?
Changing methods is possible but constrained - it is an accounting policy change that usually requires disclosure and, for tax, IRS approval in the US. Consistency is expected, so switching is not done casually. Consult your accountant before changing.
Stay in the loop
One practical finance briefing a week - new guides, checklists, and benchmarks.
See how Fintra handles the numbers behind this term
Fintra is the AI Finance Operating System for SMBs - accounting, planning, payroll, equity, and AI governance on one shared data model, with a named human approving anything consequential. Free to start, no card required.
Talk to us