{"id":24873,"date":"2025-10-24T10:35:50","date_gmt":"2025-10-24T10:35:50","guid":{"rendered":"https:\/\/www.mooninvoice.com\/blog\/?p=24873"},"modified":"2025-10-24T10:35:50","modified_gmt":"2025-10-24T10:35:50","slug":"fifo-vs-lifo","status":"publish","type":"post","link":"https:\/\/beta.mooninvoice.com\/blog\/fifo-vs-lifo\/","title":{"rendered":"FIFO vs LIFO: What\u2019s the Difference Between FIFO and LIFO?"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\/\",\n  \"@type\": \"Article\",\n  \"mainEntityOfPage\": {\n    \"@type\": \"WebPage\",\n    \"@id\": \"https:\/\/www.mooninvoice.com\/blog\/fifo-vs-lifo\/\"\n  },\n  \"headline\": \"FIFO vs LIFO: What\u2019s the Difference Between FIFO and LIFO?\",\n  \"description\": \"Explore FIFO vs. LIFO to see how they differ and how choosing the right inventory method can boost your business efficiency.\",\n  \"image\": {\n    \"@type\": \"ImageObject\",\n    \"url\": \"https:\/\/www.mooninvoice.com\/blog\/wp-content\/uploads\/2025\/10\/FIFO-VS-LIFO-FEATURE-IMAGE01.jpg\",\n    \"width\": \"1200\",\n    \"height\": \"700\"\n  },\n  \"author\": {\n    \"@type\": \"Organization\",\n    \"name\": \"Moon Invoice Team\"\n  },\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"Moon Invoice\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/cdn.mooninvoice.com\/image\/images\/logo.svg\",\n      \"width\": \"254\",\n      \"height\": \"47\"\n    }\n  },\n  \"datePublished\": \"2025-10-24\",\n  \"dateModified\": \"2025-10-24\"\n}\n<\/script><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"FAQPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is the difference between FIFO, LIFO, and average cost?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"FIFO, LIFO, and average cost differ in their working and calculation concepts for determining COGS and ending inventory value. In FIFO inventory valuation, the oldest item in inventory is sold first. In LIFO, the newest item in inventory is sold first. In the average cost method, the new average cost is calculated after every new purchase, smoothing out price fluctuations.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What are real-life examples of FIFO and LIFO?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"FIFO and LIFO are opposite concepts. Real-life examples of FIFO include a pharmacy or grocery store that sells items added first, meaning the oldest item is sold first. In LIFO, the newest item is sold first, such as in car sales where the latest model is sold first.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is FIFO best used for?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"FIFO is best used for perishable items such as edible products, beverages, medicines, and other consumables. These items lose value over time, so the oldest item is sold first before its expiration date.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Is FIFO more difficult than LIFO?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"No, FIFO is simpler and easier to utilize than LIFO. It is widely accepted in the business world due to its simple record-keeping.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Does IFRS permit LIFO?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"No, IFRS does not permit LIFO because it can understate income taxes in periods of inflation and may give a false impression of the business's financial statements.\"\n      }\n    }\n  ]\n}\n<\/script><\/p>\n<h2>What Is FIFO? Defining FIFO Definition<\/h2>\n<p>FIFO stands for First In and First Out. In this inventory management process, the oldest inventory items are sold first, and the newest items remain in stock. It leads to higher net income, lower COGS, and higher ending inventory value during inflation.<\/p>\n<p>The inventory method is often useful in industries that handle perishable goods. Such industries deal with medicines, food items, beverages, and cosmetics.<\/p>\n<p>The FIFO method works best for these items because the oldest item must be sold before it expires. Also, inventory moves naturally in chronological order. FIFO results in lower COGS and higher net income. However, FIFO is not tax beneficial.<\/p>\n<h3>Advantages of FIFO<\/h3>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>FIFO always reflects the current market value of inventory.<\/li>\n<li>It is easier to implement compared to LIFO.<\/li>\n<li>FIFO is a globally accepted method and is suitable for international businesses.<\/li>\n<li>It always presents a clearer picture of profitability.<\/li>\n<li>Inventory waste is always minimal because the older stock is sold first.<\/li>\n<\/ul>\n<h3>Disadvantages of FIFO<\/h3>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>It leads to a higher taxable income\/tax bill due to higher profits.<\/li>\n<li>FIFO doesn\u2019t reflect the true cost of goods sold when the prices go high.<\/li>\n<li>It produces less consistent financial results when prices frequently change.<\/li>\n<li>FIFO doesn\u2019t fit well for the durable goods industries.<\/li>\n<li>It brings higher tax liability.<\/li>\n<\/ul>\n<h2>Example of FIFO<\/h2>\n<p>Let\u2019s understand FIFO with a single example.<\/p>\n<p>Assuming a beverage company named \u2018Blue Star Beverages\u2019 purchased 200 units of bottles for $2 each in October, the total cost will be $400. Later, the company again purchased 400 bottles at $4 each in November.<\/p>\n<p>Later, the company sold 200 units in the first batch and 250 in the second. The COGS will be as follows:<\/p>\n<p>Sell 200 units in first batch &#8211; 200 x $2 = $400<br \/>\nSell 250 units in the second batch &#8211; 250 x $4 = $1000<\/p>\n<p>Calculating the total COGS, $400 + $1000 = $1400<\/p>\n<p>Calculating the ending inventory yields the following output.<\/p>\n<p>$400 &#8211; $250 = $150<\/p>\n<p>$150 x $4 = $600<\/p>\n<p>Thus, the total cost of goods sold is $1400, and the ending inventory is $600.<\/p>\n<div class=\"cta-sc\">\n<p class=\"cta-ttl\"><span id=\"Gain_Full_Control_of_Your_Inventory\" class=\"ez-toc-section\"><\/span>Gain Full Control of Your Inventory<\/p>\n<p class=\"cta-cnt\">Simplify your inventory computation with the #1 inventory management solution.<\/p>\n<p><a class=\"btn\" target=\"_blank\" rel=\"noopener\">Few Clicks &amp; Free Trial<\/a><\/p>\n<\/div>\n<h2>What Is LIFO? Defining LIFO Definition<\/h2>\n<p>LIFO stands for Last In First Out, which is the opposite of FIFO. It is an inventory valuation method used in accounting in which the most recently purchased or produced items are used or sold first.<\/p>\n<p>LIFO is most commonly used when there is a higher pricing period. It aligns with current inventory sales and could result in tax savings. The LIFO method results in a lower cost of goods sold.<\/p>\n<p>It is not allowable under International Financial Reporting Standards (IFRS), but it is permitted under US Generally Accepted Accounting Principles (GAAP).<\/p>\n<h3>Advantages of LIFO<\/h3>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>It improves cash flow planning by reducing taxable income during inflation.<\/li>\n<li>LIFO reduces the risk of overstated profits.<\/li>\n<li>It provides a more accurate picture of the current inventory costs.<\/li>\n<li>It is particularly suitable for businesses that handle non-perishable inventory.<\/li>\n<li>Given current market conditions, LIFO provides a more realistic view of the company\u2019s profitability.<\/li>\n<\/ul>\n<h3>Disadvantages of LIFO<\/h3>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>LIFO is unsuitable for international businesses because it is not allowed under IFRS.<\/li>\n<li>It may be administratively challenging to track inventory layers and their costs.<\/li>\n<li>LIFO is quite complex to apply and prone to errors when the business has multiple products.<\/li>\n<li>It doesn\u2019t reflect the actual flow of goods.<\/li>\n<li>The LIFO method doesn&#8217;t provide tax advantages.<\/li>\n<\/ul>\n<h2>Example of LIFO<\/h2>\n<p>We now understand the LIFO through an example.<\/p>\n<p>Suppose a widget-selling company, \u2018Wacky Widgets\u2019, purchased 100 units of widgets at $2 each in October. Later on, purchased 250 units of widgets at $3 in November and 300 units of widgets at $2 in December.<\/p>\n<p>As in LIFO, the last items are considered; we first calculate the units of December and November. The company sells the units in two different batches as follows:<\/p>\n<p>Sell 300 units in batch 1 &#8211; 300 x $2 = $600<br \/>\nSell 250 units in batch 2 &#8211; 250 x $3 = $750<\/p>\n<p>Total Cost of Goods Sold (COGS) = $600 + $750 = $1350<\/p>\n<p>The remaining inventory value will be 100 x $2 = $200, which was purchased in October.<\/p>\n<div class=\"blog-cta-main\">\n<p><strong><span style=\"margin-right: 10px; font-size: 22px;\">\ud83d\udca1<\/span>Don\u2019t forget to read:<\/strong><\/p>\n<p><a href=\"https:\/\/www.mooninvoice.com\/blog\/how-to-start-a-bookkeeping-business\/\" rel=\"\">How to start a bookkeeping business from home?<\/a><\/p>\n<\/div>\n<h2>Mastering Inventory Formula<\/h2>\n<p>Before we jump to LIFO vs FIFO, we need to get familiar with the inventory formula. Determining an inventory value is straightforward. Business professionals can easily utilize the following formula:<\/p>\n<p>A typical inventory formula is as follows:<\/p>\n<p><strong><em>Ending Inventory = Beginning Inventory + Purchases &#8211; Cost of Goods Sold (COGS)<\/em><\/strong><\/p>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>Beginning inventory &#8211; An inventory value at the start of the period.<\/li>\n<li>Purchases &#8211; Cost of inventory purchased during the period.<\/li>\n<li>Cost of Goods Sold (COGS) &#8211; Cost of items sold during the period.<\/li>\n<li>Ending Inventory &#8211; The value of inventory that remains at the end of the period.<\/li>\n<\/ul>\n<p>The cost of goods sold is also straightforward by using the <a href=\"https:\/\/www.mooninvoice.com\/blog\/how-to-calculate-cost-of-goods-sold\/\">COGS formula<\/a>:<\/p>\n<p><strong><em>Cost of Goods Sold = Starting Inventory + Purchases &#8211; Ending Inventory<\/em><\/strong><\/p>\n<h2>FIFO vs LIFO: Key Difference Between FIFO and LIFO<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-24877\" src=\"https:\/\/www.mooninvoice.com\/blog\/wp-content\/uploads\/2025\/10\/FIFO-VS-LIFO-INNER-IMAGE02.jpg\" alt=\"difference between FIFO VS LIFO\" width=\"1200\" height=\"700\" \/><\/p>\n<p>After determining and understanding what LIFO and FIFO are, we now come to their comparison.<\/p>\n<p>FIFO and LIFO are two different inventory methods. Business professionals use them depending on their work type.<\/p>\n<p>FIFO majorly focuses on the oldest inventory item, whereas LIFO focuses on the newest inventory item. Here are the major comparison points to understand the key difference between LIFO and FIFO.<\/p>\n<div style=\"height: 10px;\"><\/div>\n<div class=\"determinant-table-div\">\n<table class=\"determinant-table table table-bordered\">\n<thead>\n<tr>\n<th><b>FIFO<\/b><\/th>\n<th><b>LIFO<\/b><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Stands for First In First Out<\/td>\n<td>Stands for Last In First Out<\/td>\n<\/tr>\n<tr>\n<td>The oldest inventory is sold first, while the newer inventory remains in the stock at the end of the accounting period.<\/td>\n<td>The newest inventory is sold first, and the oldest inventory remains in the stock at the end of the accounting period.<\/td>\n<\/tr>\n<tr>\n<td>The ending inventory reflects the current market price.<\/td>\n<td>The ending inventory may understate the inventory value.<\/td>\n<\/tr>\n<tr>\n<td>Higher taxes during inflation.<\/td>\n<td>The tax impact is lower taxes due to inflation.<\/td>\n<\/tr>\n<tr>\n<td>The COGS is higher in profit and lower in inflation.<\/td>\n<td>The COGS is lower in profit and higher in inflation.<\/td>\n<\/tr>\n<tr>\n<td>This inventory method is best for perishable items and other seasonal products.<\/td>\n<td>This inventory method is best for non-perishable items and bulk items.<\/td>\n<\/tr>\n<tr>\n<td>The accounting standards are GAAP &amp; IFRS.<\/td>\n<td>The accounting standard is limited only to GAAP.<\/td>\n<\/tr>\n<tr>\n<td>The inventory flow is quite natural and in chronological order.<\/td>\n<td>The inventory flow is the opposite of FIFO and does not match the actual physical flow.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<h2>What Is the Impact of FIFO and LIFO on the Financial Statements?<\/h2>\n<p>After understanding LIFO vs FIFO, we now examine how they affect the company\u2019s financial statements. Both FIFO and LIFO have different impacts on the <a href=\"https:\/\/www.mooninvoice.com\/blog\/balance-sheet\/\">balance sheet<\/a> and income statement. The major effect is on profit, COGS, taxes &amp; inventory valuation as follows:<\/p>\n<ul style=\"list-style-type: disc; margin-left: 20px;\">\n<li>Cost of goods sold (COGS) is lower under FIFO but higher under LIFO.<\/li>\n<li>FIFO yields higher profit and net income, but both decline under LIFO.<\/li>\n<li>Taxable income is higher under FIFO but lower under LIFO.<\/li>\n<li>The ending inventory is close to market value under FIFO, but it is older under LIFO.<\/li>\n<\/ul>\n<div class=\"blog-cta-main\">\n<p><strong><span style=\"margin-right: 10px; font-size: 22px;\">\ud83d\udca1<\/span>Also Read:<\/strong><\/p>\n<p><a href=\"https:\/\/www.mooninvoice.com\/blog\/how-to-prepare-income-statement\/\" rel=\"\">How to prepare an income statement?<\/a><\/p>\n<\/div>\n<h2>FIFO or LIFO: Let\u2019s Find Out the Real Winner<\/h2>\n<p>So far, we have defined what FIFO and LIFO are. The next step is to choose the right method. It is, of course, necessary to justify which works better for the business inventory.<\/p>\n<p>Choosing between FIFO and LIFO depends on several factors and the company\u2019s nature. Market conditions, inventory costs, financial conditions &amp; system complexity are other factors.<\/p>\n<p>FIFO works best for perishable goods, while LIFO works best for non-perishable or bulk items such as metals and raw materials. For instance, if the business sells snacks, the FIFO inventory method is an ideal choice because it accounts for the cost of the most recent goods sold.<\/p>\n<p>On the other hand, LIFO works better for businesses that sell crude oil, natural gas, or any non-perishable items, given the constantly fluctuating prices.<\/p>\n<p>In short, FIFO is an ideal choice if the business goal is accurate inventory valuation and higher profits. In contrast, LIFO, as an inventory management system, is an ideal choice if the business goal is tax savings during inflationary periods.<\/p>\n<div class=\"cta-sc\">\n<p class=\"cta-ttl\"><span id=\"Experience_Smart_Inventory_Management_With_Automation\" class=\"ez-toc-section\"><\/span>Experience Smart Inventory Management With Automation<\/p>\n<p class=\"cta-cnt\">Level up your inventory management with Moon Invoice and keep your business operations running smoothly.<\/p>\n<p><a class=\"btn\">Free Trial? Click Here<\/a><\/p>\n<\/div>\n<h2>Bottom Line<\/h2>\n<p>FIFO and LIFO methods are poles apart and possess different concepts for inventory management. Business professionals need to choose the right method based on the type of business they handle and the products they sell. In the FIFO vs LIFO accounting debate, professionals need to consider financial goals and regulatory requirements.<\/p>\n<p>Using <a href=\"https:\/\/www.mooninvoice.com\/accounting-software\">online accounting software<\/a> like Moon Invoice can streamline inventory management. It offers automation that saves time and delivers correct results. Are you curious to learn how it works and to find the right partner for your business journey?<\/p>\n<p>Initiate your trial with a <a href=\"https:\/\/www.mooninvoice.com\/signup\">free sign-up<\/a>!<\/p>\n<h2>FAQs on FIFO and LIFO<\/h2>\n<div id=\"1-link-24873\" class=\"sh-link 1-link sh-hide\"><h3 onclick=\"showhide_toggle('1', 24873, 'What is the difference between FIFO and LIFO vs average cost?', 'What is the difference between FIFO and LIFO vs average cost?'); return false;\" aria-expanded=\"false\"><span id=\"1-toggle-24873\" class=\"sh-toggle\" data-more=\"What is the difference between FIFO and LIFO vs average cost?\" data-less=\"What is the difference between FIFO and LIFO vs average cost?\">What is the difference between FIFO and LIFO vs average cost?<\/span><\/h3><\/div><div id=\"1-content-24873\" class=\"sh-content 1-content sh-hide\" style=\"display: none;\">FIFO, LIFO, and average cost differ in their working and calculation concepts for determining COGS and ending inventory value. In FIFO inventory valuation, the oldest item in inventory is sold first. In LIFO, the newest item in inventory is sold first. In the average cost method, the new average cost is calculated after every new purchase. This smooths out the price fluctuations.<\/p>\n<p><\/div>\n<div id=\"2-link-24873\" class=\"sh-link 2-link sh-hide\"><h3 onclick=\"showhide_toggle('2', 24873, 'What are real-life-based LIFO and FIFO examples?', 'What are real-life-based LIFO and FIFO examples?'); return false;\" aria-expanded=\"false\"><span id=\"2-toggle-24873\" class=\"sh-toggle\" data-more=\"What are real-life-based LIFO and FIFO examples?\" data-less=\"What are real-life-based LIFO and FIFO examples?\">What are real-life-based LIFO and FIFO examples?<\/span><\/h3><\/div><div id=\"2-content-24873\" class=\"sh-content 2-content sh-hide\" style=\"display: none;\">FIFO and LIFO are two opposite concepts. Real-life examples of FIFO include a pharmacy or grocery store that sells items added first. It means the oldest item is sold first. In LIFO, the newest item is sold first. This is best suited to car selling, where the latest model is sold first.<\/p>\n<p><\/div>\n<div id=\"3-link-24873\" class=\"sh-link 3-link sh-hide\"><h3 onclick=\"showhide_toggle('3', 24873, 'What is FIFO best used for?', 'What is FIFO best used for?'); return false;\" aria-expanded=\"false\"><span id=\"3-toggle-24873\" class=\"sh-toggle\" data-more=\"What is FIFO best used for?\" data-less=\"What is FIFO best used for?\">What is FIFO best used for?<\/span><\/h3><\/div><div id=\"3-content-24873\" class=\"sh-content 3-content sh-hide\" style=\"display: none;\">FIFO is best used for peripheral items such as edible products, beverages, medicines, and other consumables. These items lose value over time. In FIFO, the oldest item is sold first before its expiration date.<\/p>\n<p><\/div>\n<div id=\"4-link-24873\" class=\"sh-link 4-link sh-hide\"><h3 onclick=\"showhide_toggle('4', 24873, 'Is FIFO more difficult than LIFO?', 'Is FIFO More Difficult than LIFO?'); return false;\" aria-expanded=\"false\"><span id=\"4-toggle-24873\" class=\"sh-toggle\" data-more=\"Is FIFO more difficult than LIFO?\" data-less=\"Is FIFO More Difficult than LIFO?\">Is FIFO more difficult than LIFO?<\/span><\/h3><\/div><div id=\"4-content-24873\" class=\"sh-content 4-content sh-hide\" style=\"display: none;\">No, FIFO is simpler and easier to utilize than LIFO. It is widely accepted in the business world due to its simple record-keeping.<\/p>\n<p><\/div>\n<div id=\"5-link-24873\" class=\"sh-link 5-link sh-hide\"><h3 onclick=\"showhide_toggle('5', 24873, 'Does IFRS permit LIFO?', 'Does IFRS permit LIFO?'); return false;\" aria-expanded=\"false\"><span id=\"5-toggle-24873\" class=\"sh-toggle\" data-more=\"Does IFRS permit LIFO?\" data-less=\"Does IFRS permit LIFO?\">Does IFRS permit LIFO?<\/span><\/h3><\/div><div id=\"5-content-24873\" class=\"sh-content 5-content sh-hide\" style=\"display: none;\">No, IFRS does not permit LIFO. The reason is that LIFO is prone to understating income taxes in periods of inflation. Also, it can give a false impression of the business&#8217;s financial statements.<\/p>\n<p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>What Is FIFO? Defining FIFO Definition FIFO stands for First In and First Out. In this inventory management process, the oldest inventory items are sold first, and the newest items remain in stock. It leads to higher net income, lower COGS, and higher ending inventory value during inflation. The inventory method is often useful in&hellip; <a class=\"more-link\" href=\"https:\/\/beta.mooninvoice.com\/blog\/fifo-vs-lifo\/\">Continue reading <span class=\"screen-reader-text\">FIFO vs LIFO: What\u2019s the Difference Between FIFO and LIFO?<\/span><\/a><\/p>\n","protected":false},"author":6,"featured_media":24874,"comment_status":"open","ping_status":"open","sticky":false,"template":"single-custom-post.php","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-24873","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","entry"],"acf":[],"_links":{"self":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts\/24873","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/comments?post=24873"}],"version-history":[{"count":0,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/posts\/24873\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/media?parent=24873"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/categories?post=24873"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/beta.mooninvoice.com\/blog\/wp-json\/wp\/v2\/tags?post=24873"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}