What is the LIFO Method?
LIFO (Last-In, First-Out) is an inventory valuation method that assumes the most recently purchased units are the first ones sold. It's mainly used in the US under GAAP and tends to lower reported profit — and taxes — when prices are rising.
Under LIFO, the cost of goods sold is based on the newest inventory costs first, while ending inventory reflects the oldest purchase costs.
- •Newest inventory costs are expensed first
- •Ending inventory = oldest (lower) costs
- •Lower reported profit — and taxes — in inflation
- •Not permitted under IFRS, only US GAAP
- •Oldest inventory costs are expensed first
- •Ending inventory = most recent (higher) costs
- •Higher reported profit in inflation
- •Accepted under both IFRS and GAAP
Try it: interactive calculator
Step-by-step worked examples
A shop's inventory: 100 units bought at $8 (Jan), then 150 units at $10 (Feb). It sells 120 units in March. Under LIFO, what is COGS?
Most recent 120 units come from the Feb batch (150 available at $10): 120 × $10 = $1,200 COGS = $1,200
Using the same purchases (100 @ $8, 150 @ $10), find the ending inventory value after selling 120 units under LIFO.
Feb batch has 150 − 120 = 30 units left at $10 = $300 All 100 units of the Jan batch remain at $8 = $800 Ending inventory = 300 + 800 = $1,100
A store bought 50 units at $20 in Week 1, then 30 more units at $25 in Week 2, and sells 40 units in Week 3. What is LIFO COGS?
First take all 30 units from the newest (Week 2) batch: 30 × $25 = $750 Still need 10 more units, taken from the Week 1 batch: 10 × $20 = $200 COGS = 750 + 200 = $950
Flashcards
Quick quiz
Q1.LIFO assumes that…
Q2.100 units bought at $5, then 50 at $7. If 120 units are sold under LIFO, what is COGS?
Q3.During rising prices, LIFO generally results in…
Q4.Under LIFO, ending inventory is valued using…
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Common mistakes
Assuming LIFO means the oldest costs are used for COGS. — Correct: It's the opposite — LIFO expenses the NEWEST costs first.
Using LIFO for IFRS-based financial statements. — Correct: LIFO is banned under IFRS; only companies reporting under US GAAP can use it.
Ignoring the 'LIFO reserve' when comparing to FIFO-based companies. — Correct: The LIFO reserve adjusts LIFO figures to a FIFO-equivalent basis for fair comparison.
Thinking LIFO always mirrors physical stock flow. — Correct: LIFO is a costing assumption; most businesses don't literally ship their newest inventory first.
FAQ
What is the LIFO method?
LIFO (Last-In, First-Out) is an inventory costing method where the most recently purchased costs are assigned to units sold first.
What is the LIFO formula?
COGS under LIFO = units sold × unit cost of the newest available inventory layer(s), consumed in reverse purchase order.
What are some LIFO examples?
A coal or gravel pile where new material is scooped from the top first, or a US retailer minimizing taxable income during inflation.
How do you calculate LIFO COGS and ending inventory?
List purchases in order, assign the newest cost layers to units sold for COGS, and value remaining units using the oldest cost layers for ending inventory.