FIFO vs LIFO: Which Inventory Method Is Right for Retailers?

FIFO and LIFO are inventory accounting methods that decide which units are counted as sold when calculating cost of goods sold. The choice affects gross margin, taxes, and how your financial statements compare to peers. Most retailers should default to FIFO; some are better served by weighted average. LIFO is rarely the right answer in modern retail.

What each method means

FIFO (first in, first out) treats the oldest units as sold first. LIFO (last in, first out) treats the newest units as sold first. Weighted average uses a blended cost across all units in stock. The actual physical movement of goods may be different — these are accounting conventions, not warehouse rules.

Margin impact

In an inflationary environment, FIFO reports lower COGS (because older, cheaper inventory is expensed first) and therefore higher gross margin. LIFO reports higher COGS and lower margin. Weighted average sits between the two. Choose the method that best represents the economics of your business and apply it consistently.

Tax considerations

LIFO can reduce taxable income in inflationary periods by inflating COGS, which is why some U.S. retailers historically used it. However, LIFO is not permitted under IFRS and is increasingly avoided as global accounting standards converge. Most modern retailers — and all retailers outside the U.S. — use FIFO or weighted average.

Which method to choose

Default to FIFO for retail. It is the simplest, the closest to actual physical flow, and the standard in modern accounting. Use weighted average for high-volume, low-differentiation inventory like bulk commodities. Avoid LIFO unless tax-driven and clearly understood by your auditors.

The bottom line

The accounting method should follow the business reality, not the other way around. Pick one method, document it, apply it consistently, and make sure investors and operators interpret your gross margin in the same way.