{"id":2645,"date":"2020-03-22T09:00:00","date_gmt":"2020-03-22T09:00:00","guid":{"rendered":"https:\/\/brightpearl20.wpengine.com\/fifo-vs-lifo-which-is-best\/"},"modified":"2025-04-24T15:19:25","modified_gmt":"2025-04-24T15:19:25","slug":"fifo-vs-lifo-which-is-best","status":"publish","type":"post","link":"https:\/\/www.brightpearl.com\/blog\/fifo-vs-lifo-which-is-best","title":{"rendered":"FIFO vs LIFO: Key Differences and Which Method to Use"},"content":{"rendered":"

FIFO (First In, First Out) and LIFO (Last In, First Out) are two primary inventory valuation methods used in accounting. FIFO assumes that the first items purchased are the first to be sold, while LIFO assumes that the last items purchased are sold first. These methods significantly impact financial reporting, tax calculations, and inventory management<\/a>. Understanding when to use FIFO vs. LIFO is essential for businesses to optimise their operations and manage costs effectively.<\/p>\n

Having a strong inventory system<\/a> is essential for any business. It lets you know what needs re-ordering and when. It tells you how much stock you have left of a particular item and how well it is selling. It also keeps stock moving and prevents it from sitting in the warehouse<\/a> gathering dust.\u00a0<\/span><\/p>\n

But you also need to know how much money your stock is making. It’s not just important for your own bookkeeping – it’s important for tax purposes too.<\/span><\/p>\n

There are two methods of <\/span>tracking stock<\/span><\/a> and figuring out profit. These are known as LIFO and FIFO. These acronyms may sound like a couple of kid\u2019s TV characters, but actually, they\u2019re great ways of calculating the unit costs of goods that have been sold.\u00a0<\/span><\/p>\n

The LIFO definition stands for last in, first out. As such, it presumes that the most recent products in a company\u2019s inventory gets sold first. It then uses these production costs. Whilst the FIFO definition means first in, first out. In this case, the oldest products in the inventory have been sold first. Therefore, this is how production costs are calculated.<\/span><\/p>\n

\"Image<\/a><\/p>\n

FIFO vs LIFO: Which is better for your business?<\/h2>\n

The first obvious difference is that they are opposite in the how they view the flow of inventory, and how they’re carried out. What kind of business you run will make a difference to the type of method that works best for you.\u00a0<\/span><\/p>\n

For example, if you sell computers, then the FIFO method would work best, as you don\u2019t want the old and dead stock<\/a> to sit there and fall into obsolescence. While if you sell fresh cakes, the LIFO method would work better. As you want that fresh produce to go to market before it goes bad.\u00a0<\/span><\/p>\n

Otherwise, depending on your product, you can figure out if the FIFO or LIFO method is best for you. Choosing the right method will help maximize profit.\u00a0<\/span><\/p>\n

As the methods go off inventory totals, both ways must assume that stock is being sold as intended orders. This helps calculate the cost of goods sold (COGS).\u00a0<\/span><\/p>\n

The FIFO Process in inventory management<\/h2>\n

It’s simple to use FIFO – the first in, first out method means just that. The oldest inventory items are always the first to go. So, old stock isn\u2019t left hanging around. Whether you\u2019re running an <\/span>e-commerce<\/span> site or a bricks and mortar company, the outcome is the same. It basically means that whatever is at the front of the queue goes first. Products leave the warehouse in the order in which they arrived.\u00a0<\/span><\/p>\n

Stocktake, net income and profit are processed and calculated based on this way of selling. This affects your inventory accounting and the tax you pay.\u00a0<\/span><\/p>\n

This type of stock calculation is the most used method. It means you’re more likely to use the actual price you paid for the products and\/or raw materials. It\u2019s an easier method to get to grips with and to put in place. And it also means that money is not lost on your stock. As the FIFO method of inventory requires more of a natural flow, fewer mistakes are likely to happen. Especially when it comes to adding it all up at the end of the accounting period. <\/span><\/p>\n

You may be asking how to do FIFO and LIFO? There is a way to figure out the COGS when looking your first in, first out balance sheet. You work out the cost of your oldest inventory and multiply that by the number of inventory you sold.<\/span><\/p>\n

To calculate COGS using the LIFO method, you need to focus on the cost of your most recent inventory. Then multiply that by the amount of inventory sold. We will look in more detail at LIFO later.\u00a0<\/span><\/p>\n

The following image from <\/span>Wall Street Mojo<\/span><\/a> is a great example of how FIFO works:\u00a0<\/span><\/p>\n

\"Explaining<\/p>\n

FIFO Accounting: How it impacts financial reporting<\/h3>\n

When it comes to inventory accounting<\/a>, there is a difference in the result of FIFO and LIFO. The method of inventory management you choose will impact your financial results and tax payments. Here is what to take into consideration when looking at first in, first out accounting:\u00a0<\/span><\/p>\n