Imagine you’re running a business that sells coffee beans. You buy beans at different prices throughout the year. When you make a sale, do you assume you’re selling the oldest beans first or the most recently purchased ones? This decision isn’t just about inventory flow—it directly affects your taxes, financial reports, and profit margins. That’s where FIFO (First In, First Out) and LIFO (Last In, First Out) come in. In this guide, we’ll break down these inventory valuation methods, their impact on financials, and how Qoblex can simplify your inventory management.
Understanding Different Inventory Accounting Methods
Inventory accounting determines how a business records the cost of its products. There are three primary methods:
- FIFO (First In, First Out) – The oldest inventory is sold first, meaning your cost of goods sold (COGS) reflects older, often cheaper costs.
- LIFO (Last In, First Out) – The most recently purchased inventory is sold first, meaning COGS reflects newer, often higher costs.
- Weighted Average Cost (WAC) – Uses the average cost of all inventory items to determine the cost of goods sold.
For this article, we’ll focus on FIFO and LIFO and how they impact your business.
FIFO vs LIFO: Inventory Valuation
Inventory valuation affects how your stock is priced and how profits appear on your books.
- FIFO: Since older inventory costs are used, your remaining stock reflects the most recent purchase prices, which is closer to the current market value.This principle is fundamental in raw material management systems where accurate cost tracking drives production efficiency.
- LIFO: Newer inventory costs are applied to COGS, meaning your remaining stock may be undervalued in times of inflation.
| Factor | FIFO | LIFO |
| Inventory Cost Valuation | Higher, as recent purchases remain in stock | Lower, as older purchases remain in stock |
| COGS Calculation | Based on older costs | Based on newer costs |
| Profit Margins | Higher in inflation | Lower in inflation |
FIFO vs LIFO: Impact on Inflation
During inflation, prices rise over time. Here’s how FIFO and LIFO react:
- FIFO: Since you’re using older (cheaper) inventory costs for COGS, your profits appear higher, which can mean higher taxable income.
- LIFO: Because newer (higher) inventory costs are used for COGS, your reported profits are lower, leading to lower taxable income but less attractive financials.
This difference can significantly impact business decisions, especially for tax planning.
FIFO vs LIFO: Financial Reporting
Choosing between FIFO and LIFO changes how your financial statements look:
- FIFO: Shows a higher net income when prices rise, making your company look more profitable.
- LIFO: Shows a lower net income, which can be useful in reducing tax liabilities but may make financials look weaker to investors.
Public companies often avoid LIFO because it can make them seem less profitable.
FIFO vs LIFO: Cash Flow Implications
Different inventory accounting methods can impact a company’s cash flow:
- FIFO: Higher reported profits may lead to higher tax liabilities, reducing cash flow.
- LIFO: Lower reported profits result in lower tax payments, improving short-term cash flow.
For businesses with tight cash flow, choosing LIFO might provide a liquidity advantage in inflationary times.
FIFO vs LIFO: Industry-Specific Applications
Certain industries favor one method over the other:
- Industries that prefer FIFO: Food and beverage, pharmaceuticals, and retail (where inventory has a short shelf life).
- Industries that prefer LIFO: Manufacturing, oil and gas, and construction (where inventory costs rise over time).
Choosing the right method depends on business needs and industry standards.
FIFO vs LIFO: Pros and Cons
| Factor | FIFO (First-In, First-Out) | LIFO (Last-In, First-Out) |
| Advantages | – More accurate inventory valuation – Matches physical inventory flow – Accepted under IFRS and GAAP | – Reduces taxable income during inflation – Lowers short-term tax liabilities – Can improve cash flow |
| Disadvantages | – Higher taxable income during inflation – Not ideal for reducing tax burdens | – Not accepted under IFRS – Inventory may be undervalued – Can make financials look weaker |
FIFO vs LIFO and Gross Profit Margins
Your inventory accounting method impacts gross profit margins:
- FIFO: Results in higher profit margins when costs are rising.
- LIFO: Leads to lower profit margins but reduced tax liabilities.
This can influence pricing strategies, financial performance, and business growth.
FIFO vs LIFO in eCommerce and Online Retail
For eCommerce businesses, FIFO is the preferred method because:
- Online sales move fast, and inventory turnover is high.
- FIFO matches real-world sales behavior, reducing discrepancies.
- Compliance with international accounting standards is easier. For businesses operating WooCommerce stores, mastering WooCommerce-specific inventory management techniques ensures both accounting accuracy and operational efficiency.
Legal and Regulatory Considerations for FIFO and LIFO
- LIFO is banned under IFRS, which is used in most countries outside the U.S.
- FIFO is universally accepted, making it the preferred choice for global businesses.
- Businesses using LIFO in the U.S. must maintain consistent application for tax purposes.
How Qoblex Can Help with FIFO and LIFO
Qoblex provides businesses with flexible inventory management features that support both FIFO and LIFO calculations. With real-time tracking, automated cost calculations, precise product identification, and seamless accounting integrations, Qoblex simplifies inventory control.
FIFO vs LIFO FAQs
LIFO lowers taxable income by using higher recent costs for COGS.
No, LIFO is only permitted in certain jurisdictions, like the U.S.
FIFO, as it reflects recent purchase costs.
LIFO helps reduce taxable income during inflation.
Generally, businesses must apply for IRS approval to change methods.
Yes, Qoblex allows businesses to track inventory using both methods.
FIFO is more common because it aligns with standard accounting practices.
FIFO shows higher profits during inflationary periods.
LIFO reduces taxable income, potentially increasing available cash flow.
Yes, depending on their accounting practices and regulations.
Conclusion
Choosing between FIFO and LIFO is more than an accounting decision—it affects your profits, taxes, and financial reports. FIFO is great for accurate inventory valuation, while LIFO can help reduce taxable income in times of inflation. Qoblex makes it easy to track and apply both methods, ensuring that businesses can focus on growth while maintaining precise inventory records.
Need help managing your inventory smarter? Sign up for a Qoblex account today!
About Qoblex
Since 2016, Qoblex has been the trusted online platform for small and medium-sized enterprises (SMEs), offering tailored solutions to simplify the operational challenges of growing businesses. Specifically designed for B2B wholesalers, distributors, and eCommerce ventures, our software empowers users to streamline operations from production to fulfillment, allowing them to concentrate on business growth. Qoblex efficiently manages inventory and order data across multiple sales channels including Shopify and WooCommerce, integrates with popular accounting systems such as Xero and QuickBooks, warehouses, and fulfillment systems, and boasts a robust B2B eCommerce platform. With a diverse global team, Qoblex serves a customer base in over 40 countries, making it a reliable partner for businesses worldwide.
