Inventory Guide

FIFO vs. LIFO for Retail Inventory: Differences and Examples

By Stash

FIFO assumes the oldest inventory costs are sold first, while LIFO assumes the newest costs are sold first. For many retailers, FIFO also resembles the physical flow of goods because older or more perishable stock should leave first. LIFO is an accounting cost-flow method; it does not mean staff should physically sell the newest products first.

The choice affects cost of goods sold, reported profit and the value of ending inventory when purchase costs change. It can also affect tax and financial-reporting obligations, so the accounting method should be selected with a qualified accountant.

FIFO vs. LIFO at a glance

Question	FIFO	LIFO
Cost flow	Oldest costs leave first	Newest costs leave first
Common physical fit	Perishable, dated or obsolescence-prone goods	Accounting election; not necessarily physical flow
Allowed under U.S. GAAP	Yes	Yes
Allowed under IFRS	Yes	No

KPMG's 2026 comparison of IFRS and U.S. GAAP inventory accounting confirms that LIFO is available under U.S. GAAP but prohibited under IFRS. Accounting requirements can change and depend on jurisdiction and reporting status.

FIFO example

Suppose a retailer buys:

100 units at $10 each
100 more units at $12 each

The retailer then sells 120 units.

Under FIFO, the first 100 units use the $10 cost and the next 20 use the $12 cost:

FIFO COGS = (100 × $10) + (20 × $12) = $1,240

The remaining 80 units use the newer $12 cost:

FIFO ending inventory = 80 × $12 = $960

LIFO example

Using the same purchases and sale, LIFO assigns the newest $12 costs first:

LIFO COGS = (100 × $12) + (20 × $10) = $1,400

The remaining 80 units use the older $10 cost:

LIFO ending inventory = 80 × $10 = $800

How rising costs change the results

In this example, purchase costs rose from $10 to $12. LIFO therefore produced higher COGS and lower ending inventory than FIFO. If the selling price is the same, the higher COGS also produces lower reported gross profit for that period.

Result	FIFO	LIFO
COGS	$1,240	$1,400
Ending inventory	$960	$800

If costs fall, the direction can reverse. The effect depends on the sequence of purchase costs and sales.

FIFO for retail operations

FIFO is often intuitive for groceries, coffee, beauty products, fashion, electronics and other stock that can expire, age, go out of season or become obsolete. Store teams rotate older stock forward and sell it before newer receipts where practical.

Physical FIFO reduces waste and aging risk, but the accounting records still need consistent cost layers and controls. See the guides to inventory shrinkage and dead stock.

When LIFO may be considered

LIFO is primarily an accounting decision for eligible U.S. businesses. During periods of rising costs, assigning recent higher costs to COGS can reduce reported profit relative to FIFO. That may affect taxes, but it also lowers ending inventory values and can complicate comparison with businesses using other methods.

Retailers should not choose LIFO based on a simple tax generalization. Eligibility, financial statements, disclosures, consistency requirements and future consequences require professional accounting advice.

Physical stock flow and accounting cost flow are different

A retailer can physically rotate goods oldest-first while using a permitted accounting method that does not exactly mirror each physical unit. The accounting method assigns costs; the warehouse or store method determines which item is actually picked.

Keep these policies separate and document both:

Physical rotation policy: how staff select and move actual goods
Inventory costing policy: how costs are assigned for financial reporting

What about weighted-average cost?

Weighted-average cost combines available inventory costs into an average cost per unit. It can be practical when units are interchangeable and tracking individual cost layers adds little operational value.

For example, if 100 units cost $10 and 100 units cost $12, the weighted-average cost is:

($1,000 + $1,200) ÷ 200 = $11 per unit

If 120 units are sold, COGS would be $1,320 and ending inventory would be $880 under this simple periodic example.

How the costing method affects inventory KPIs

Because the method changes COGS and inventory value, it can also change ratios that use those figures. For example:

Inventory turnover uses COGS and average inventory
Days Sales of Inventory uses average inventory and COGS
Carrying-cost analysis may use average inventory value

When comparing periods, locations or companies, confirm that the inventory-costing basis is consistent.

FIFO vs. LIFO decision checklist

Which accounting standards and tax rules apply?
Does the business operate or report outside the United States?
Are purchase costs stable, rising or volatile?
Does the physical stock expire or become obsolete?
How will the method affect statements, ratios and lender reporting?
Can the accounting system maintain the required cost layers?
What are the consequences of changing methods later?

Use this checklist to structure a discussion with an accountant; it is not a substitute for accounting or tax advice.

Frequently asked questions

Is FIFO better than LIFO for retail?

FIFO often fits the physical flow of perishable or obsolescence-prone retail stock and is permitted under both U.S. GAAP and IFRS. The best accounting method depends on jurisdiction, costs and reporting needs.

Does LIFO mean selling the newest inventory first?

No. LIFO is an accounting cost-flow assumption. A retailer can still rotate actual goods using an oldest-first process.

Why does FIFO show higher profit when costs rise?

FIFO assigns older, lower costs to COGS first in a rising-cost example, producing lower COGS and higher gross profit than LIFO, all else equal.

Can a business switch from FIFO to LIFO?

Changing an accounting method can require approvals, disclosures and tax consequences. Consult a qualified accountant before changing methods.