LIFO is the mirror image of FIFO. Instead of assuming the oldest stock sells first, it assumes the newest stock does. This is mostly an accounting convention, not a picture of how stock really moves — few businesses actually pull their newest shipment off the shelf first.

How LIFO Works

Under LIFO, the cost of goods sold uses the cost of the newest purchases. That means older, sometimes cheaper stock stays valued on the books. The cost of goods sold reflects more current purchase prices instead.

A Simple Example

Using the same numbers as before — 100 units bought at $10, then 100 more at $12 — say the business sells 120 units. LIFO assumes the first 100 units sold came from the newer $12 batch. The last 20 came from the older $10 batch. Cost of goods sold works out to (100 × $12) + (20 × $10) = $1,400. The 80 units left in stock are valued at $10 each.

LIFO During Rising Prices

When purchase costs are rising, LIFO tends to report higher cost of goods sold and lower reported profit. That's because it matches current, higher costs against current sales. This can lower taxable income when prices are going up. That's part of why some businesses choose LIFO.

Where LIFO Is Used

LIFO is common in certain fields. It's used a lot in the United States, where tax rules allow it. It's used less outside the U.S., since many accounting rules there don't allow it. Businesses thinking about LIFO usually go over the effects with an accountant. That's because it directly affects reported profit and taxes owed.

Key Takeaways

LIFO values inventory by assuming the newest stock sells first. That's mainly an accounting choice, not a picture of real handling. It behaves in a different way from FIFO, most of all when purchase costs are rising. That makes the choice between the two methods a real financial decision.

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