LIFO (Last In, First Out)

Last In, First Out (LIFO) is an inventory accounting method in which the most recently received units are matched against the most recent sales. The newest stock is treated as the first to be sold for accounting purposes, while older stock remains carried at its original cost.

What LIFO means

Like FIFO, LIFO operates at two levels — but its physical and accounting versions are usually decoupled.

• Accounting LIFO: COGS is calculated using the cost of the most recent units received. In rising-cost environments, this assigns higher costs to COGS, reducing reported gross margin and taxable income.
• Physical LIFO: rare in practice. Most warehouses rotate stock physically using FIFO regardless of accounting method, because physical LIFO leaves older stock to age out.

Why LIFO is used (and where it isn't permitted)

LIFO's primary appeal is tax. In periods of inflation or rising input costs, LIFO produces lower reported profit and therefore a lower tax bill compared to FIFO. The trade-off: financial statements show thinner margins, which can affect lender perceptions, investor reporting, and earnings comparisons.

LIFO is permitted under U.S. GAAP but prohibited under IFRS, which means brands operating internationally cannot use LIFO for consolidated financial reporting outside the U.S. This is the practical reason most ecommerce brands — even those domiciled in the U.S. — default to FIFO or weighted average: simpler, more universally accepted, and consistent across markets.

LIFO trade-offs in ecommerce

• Lower reported profits: margins look thinner under LIFO in inflationary periods, even when underlying business performance is the same.
• LIFO reserves: the difference between LIFO and FIFO valuation accumulates as a reserve on the balance sheet — a useful figure for analysts but additional accounting complexity.
• Misalignment with physical reality: selling the newest stock first leaves older stock to potentially expire, become obsolete, or fall out of trend. Most ecommerce brands physically operate FIFO regardless of accounting choice.
• International limits: brands planning international expansion or eventual public listing under IFRS will need to convert to FIFO at some point — making early adoption of LIFO a future migration cost.

LIFO vs. FIFO vs. weighted average

The choice between methods is typically made at the accounting policy level, not the operational level. Most growth-stage Shopify brands default to FIFO or weighted average. LIFO is more common in mature, U.S.-domiciled businesses with stable inventory and a tax optimization motive — and even there, it's been declining in use over the last two decades.