FIFO vs LIFO Accounting - AccountingTools

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FIFO vs. LIFO Accounting

Accounting Controls

LIFO
is a contraction of the term "last in, first out," and means that the goods last added to
inventory are assumed to be the first goods removed from inventory for sale.

Accounting Procedures
Bookkeeping Guidebook
Business Ratios
Cash Management
CFO Guidebook
Closing the Books
Controller Guidebook
Corporate Finance
Cost Accounting

Why use one method over the other? Here are some considerations that take into account
the fields of accounting, materials flow, and financial analysis:

Materials
flow

Financial Analysis
Inflation

GAAP Guidebook
Hospitality Accounting
IFRS Guidebook
Interpretation of Financials

In most businesses, the actual flow of There are few businesses where the
materials follows FIFO, which makes

oldest items are kept in stock whiler

this a logical choice.

newer items are sold first.

sold are the least expensive, so your

sold are the most expensive, so your

cost of goods sold decreases, you

cost of goods sold increases, you report

report more profits, and therefore pay fewer profits, and therefore pay a
a larger amount of income taxes in

smaller amount of income taxes in the

the near term.

near term.

If costs are decreasing, the first items If costs are decreasing, the last items

Inventory Accounting
Lean Accounting Guidebook

Deflation

Mergers & Acquisitions

sold are the most expensive,

so your

sold are the least expensive,

so your

cost of goods sold increases, you

cost of goods sold decreases, you report

report fewer profits, and therefore

more profits, and therefore pay a larger

pay a smaller amount of income taxes amount of income taxes in the near

Nonprofit Accounting

in the near term.

Payables Management

Operations Bestsellers

Financial
reporting

There are no GAAP or IFRS restrictions method at all. The IRS allows the use of
on the use of FIFO in reporting

LIFO, but if you use it for any

financial results.

subsidiary, you must also use

it for all

Constraint Management

parts of the reporting entity.

Human Resources Guidebook

Inventory Management
Purchasing Guidebook

term.
IFRS does not all the use of the LIFO

Payroll Management
Public Company Accounting

LIFO Method

If costs are increasing, the first items If costs are increasing, the last items

Credit & Collection Guidebook

Investor Relations

FIFO Method

Issue

Cost Management Guidebook

Fixed Asset Accounting

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first added to inventory

are assumed to be the first goods removed from inventory for sale.

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Budgeting

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inventory. FIFO is a contraction of the term "first in, first out," and means that the goods

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FIFO and LIFO are cost layering methods used to value the cost of goods sold and ending

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There are usually fewer inventory

Record
keeping

layers to track in a FIFO system, since

the oldest layers are continually used
up. This reduces record keeping.

Since there are few inventory layers,

Reporting

There are usually more inventory layers

to track in a LIFO system, since the
oldest layers can potentially remain in
the system for years. This increases
record keeping.
There may be many inventory layers,

and those layers reflect recent

some with costs from a number of years

pricing, there are rarely any unusual

ago. If one of these layers is accessed,

fluctuations spikes or drops in the cost of goods

http://www.accountingtools.com/fifo-vs-lifo-accounting[3/29/2015 11:34:47 AM]

it can result in a dramatic increase or

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FIFO vs LIFO Accounting - AccountingTools

sold that are caused by accessing old

decrease in the reported amount of cost

inventory layers.

of goods sold.

In general, LIFO accounting is not recommended, for the following reasons:

It is not allowed under IFRS, and a large part of the world uses the IFRS framework.
The number of layers to track can be substantially larger than would be the case under
FIFO.
If old layers are accessed, costs may be charged to expense that vary substantially from
current costs.
In essence, the primary reason for using LIFO is to defer the payment of income taxes in an
inflationary environment.
Related Topics
First-in first-out method
Last-in first-out method
Specific identification method
Weighted average method
What are perpetual LIFO and periodic LIFO?

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