In inventory management, the method you choose to value and move stock affects costs, taxes, and profits. Last In, First Out (LIFO) is one of the most widely known approaches — especially in industries where prices are rising.
LIFO assumes the most recently purchased or produced inventory is sold first, while older stock remains in storage. This can reduce taxable income in periods of inflation, but it also changes how your balance sheet looks. Understanding how LIFO works helps you decide if it’s the right fit for your inventory strategy.
Understanding last in, first out (LIFO)
LIFO is an inventory valuation and cost flow assumption method. Under LIFO, the latest goods added to inventory are the first ones recorded as sold or used. This doesn’t always mean you physically move stock in this order — it’s an accounting method for assigning costs to goods sold.
For example, if you buy 100 units at $5 each and later buy another 100 at $6 each, LIFO says the $6 units are sold first. The $5 units remain in inventory for valuation purposes.
Why businesses use LIFO in inventory management
The main reason companies choose LIFO is to match the most recent inventory costs to current revenues. When costs are rising, this typically results in higher cost of goods sold (COGS) and lower reported profits — which can reduce taxable income.
In industries with volatile or rising prices, LIFO can give a more realistic view of profitability by reflecting current market costs in financial statements.
However, LIFO is not allowed under International Financial Reporting Standards (IFRS) and is primarily used in the United States under Generally Accepted Accounting Principles (GAAP).
How LIFO works in practice
Imagine a business buys:
- 100 units at $5 each in January
- 100 units at $6 each in March
If the business sells 120 units in April under LIFO, the COGS calculation would be:
- First, 100 units from the March purchase at $6 = $600
- Then, 20 units from the January purchase at $5 = $100
Total COGS = $700. The remaining 80 units in inventory are valued at $5 each, or $400 total.
Benefits of using LIFO
Tax advantages in inflation — Higher recent costs mean higher COGS, which reduces taxable income when prices are rising.
Better cost matching — LIFO matches current costs to current revenues, giving a clearer picture of margins in volatile markets.
Cash flow improvement — Lower taxes in the short term can leave more cash available for reinvestment in the business.
With Trebley’s inventory management services, you get accurate tracking of purchase dates, costs, and quantities — making LIFO calculations easier and reducing the risk of reporting errors.
Limitations of LIFO
Lower reported profits — While this can be beneficial for taxes, it may make the company appear less profitable to investors or lenders.
Inventory distortion — Older stock values can remain on the books for years, which may differ greatly from their current market value.
Regulatory restrictions — LIFO is not allowed under IFRS, so it’s not an option for many international companies.
Complex tracking — LIFO requires precise purchase and cost data. Trebley’s integrated warehouse and transport operations ensure that each batch of goods is logged and traceable from receipt to sale.
LIFO vs. other inventory methods
First In, First Out (FIFO) — The opposite of LIFO, where the oldest stock is sold first. FIFO often shows higher profits in inflationary periods because COGS is based on older, lower costs.
Weighted Average Cost — Uses the average cost of all units in inventory for COGS, smoothing out price changes over time.
Each method affects financial statements differently, so the right choice depends on your pricing environment, tax strategy, and compliance requirements.
Applying LIFO in real business operations
LIFO is common in industries where prices tend to rise over time:
- Wholesale distribution — Helps offset cost increases in bulk goods.
- Manufacturing — Matches recent raw material costs to product sales.
- Retail — Useful for non-perishable goods with fluctuating prices.
For businesses using LIFO, a strong inventory system is essential. Trebley’s 140,000 sq ft warehouse and scalable storage solutions make it possible to maintain accurate stock records for each batch, so your financial reporting stays compliant and precise.
Conclusion
LIFO is a strategic inventory management method that can reduce taxable income and better align current costs with current sales in certain market conditions. It’s not suitable for every business, and regulatory limitations mean it’s mainly used in the US.
When you choose LIFO, your success depends on accurate cost tracking and disciplined recordkeeping. Trebley’s warehousing, transportation, and inventory services give you the operational backbone to apply LIFO efficiently while keeping your data reliable.
FAQs
What is LIFO in inventory management?
LIFO stands for Last In, First Out. It’s an accounting method where the newest inventory costs are recorded as sold first.
Why would a business use LIFO?
To match recent costs to current revenues and reduce taxable income during inflation.
Is LIFO allowed everywhere?
No. It’s allowed under US GAAP but prohibited under IFRS, which many countries follow.
Does LIFO mean physically selling the newest stock first?
Not necessarily. It’s mainly an accounting method, though some businesses apply it operationally.
How can a 3PL help with LIFO?
A 3PL like Trebley provides the accurate tracking, storage, and transport coordination needed to ensure LIFO is applied correctly in financial reporting.
