What is LIFO?
LIFO is a bookkeeping rule that expenses your newest inventory first, so the cost of your latest goods reaches the income statement before the cost of older stock. During inflation, that timing matches today’s higher costs against today’s revenue, which raises cost of goods sold (COGS) and trims both reported profit and the tax bill. Keep in mind that LIFO is a cost-flow assumption for the books, so it does not have to match how physical stock actually leaves the shelf.
Key characteristics
- Cost-flow assumption and formula: LIFO prices your sales using your latest costs first, so COGS = cost of most recent goods x number of goods sold.
- Inflation and tax effect: As purchase costs increase, LIFO produces higher COGS, lower reported profit, and lower taxable income.
- U.S. only, with a conformity rule: The U.S. tax code (IRC §472) authorizes LIFO but requires any taxpayer who uses it for taxes to also use it in reports to shareholders and creditors, known as the LIFO conformity rule.
- Not permitted internationally: Under IAS 2 (IFRS Foundation) paragraph 25, inventory cost must be assigned using FIFO or weighted average cost, so LIFO is not a permitted formula under International Financial Reporting Standards (IFRS).
- Best fit: LIFO suits non-perishable goods where the physical order of sale does not matter, unlike first in, first out (FIFO), which sells your oldest stock first.
Example
Picture a hardwood dining-table maker that builds tables in two batches. The first batch is 10 tables produced at $200 each. Later, rising lumber prices push the second batch to $250 each for another 10 tables. The maker then sells 10 tables. Under LIFO, the newest batch counts as sold first, so COGS = $250 x 10 = $2,500. The older, cheaper batch at $200 each remains on hand and rolls into next period when you calculate ending inventory.
Related terms
FAQ
Is LIFO allowed under international accounting rules?
No. IAS 2 permits only FIFO or weighted average cost, so LIFO is used almost exclusively by U.S. companies.
Why do companies choose LIFO?
When prices rise, LIFO reports higher cost of goods sold, which lowers taxable income and frees up cash.
Is LIFO widely used?
No, it stays a minority method. According to a CPA Journal analysis from June 2025, only about 7% of U.S. public companies with inventory use LIFO, with adoption skewed toward larger companies.