FIFO assumes the oldest stock sells first. LIFO assumes the newest stock sells first. Neither method has to match how items really move off a shelf. They're just accounting rules used to work out cost of goods sold and the value of the stock left over.

The core difference comes down to which units are assumed to sell first. That single assumption changes cost of goods sold, profit, and balance sheet value.

Side-by-Side Comparison

Using the earlier example — 100 units bought at $10, then 100 more at $12, with 120 units sold — the two methods give different results:

  • FIFO: Cost of goods sold = $1,240. Remaining inventory value = $960 (80 units at $12).
  • LIFO: Cost of goods sold = $1,400. Remaining inventory value = $800 (80 units at $10).

Same purchases, same units sold — but different cost of goods sold, different profit, and different inventory value on the balance sheet.

How Each Behaves During Rising Prices

When costs are rising, FIFO shows lower cost of goods sold and higher profit. That's because it uses older, cheaper costs against current sales. LIFO shows higher cost of goods sold and lower profit, since it uses newer, higher costs. This pattern flips when costs fall.

Which Businesses Tend to Use Each

FIFO is more common worldwide. It fits well with businesses selling goods that spoil or go out of style quickly, where selling older stock first also makes sense day to day. LIFO is used mainly where local tax rules allow it. Businesses often choose it to lower reported profit and taxable income when costs are rising.

Key Takeaways

FIFO and LIFO can give very different cost of goods sold, profit, and balance sheet values from the same purchase and sales data. The right choice usually comes down to what a business stocks, local accounting rules, and how each method affects its reported numbers.

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