LIFO (Last In, First Out)
Definition
An inventory costing method that assumes the newest units are sold first, so COGS uses the most recent costs. It is allowed under U.S. GAAP but not under international standards.
Want a deeper explanation?
When costs are rising, LIFO shows a higher COGS and lower taxable income than FIFO, which is why some businesses choose it. It is rare for small e-commerce brands.
It adds complexity and requires consistency, and switching methods needs IRS approval. Watch for: choosing a costing method for tax reasons without considering how it affects lending and valuation.
Example
You bought 100 units at $10 and then 100 at $12. You sell 120. Under LIFO, COGS is (100 × $12) + (20 × $10) = $1,400.