FIFO, LIFO, and weighted average compared
| Method | In Rising Prices | Tax Effect | Cash Flow Effect |
|---|---|---|---|
| FIFO (First In, First Out) | Lower COGS, higher profit | Higher taxes | Lower cash (more tax paid) |
| LIFO (Last In, First Out) | Higher COGS, lower profit | Lower taxes | Higher cash (less tax paid) |
| Weighted Average | Middle ground | Moderate | Moderate |
Why LIFO is a US-only method
LIFO is only allowed under US GAAP, not IFRS. This is one reason comparing US and international companies requires careful adjustment.
Which method reports the highest profit in inflation
Why analysts restate LIFO firms to FIFO
What the cost-flow choice does to taxes and cash
Using the LIFO reserve to compare companies
Going deeper (optional). Up next: Using the LIFO reserve to compare companies — an advanced aside you can skip on first pass and come back to anytime. Continue when you're curious.
Going Deeper — the LIFO reserve as a comparability bridge. When peers use FIFO and the company uses LIFO, restate to FIFO before comparing margins, ROIC, or inventory turns. The formulas: FIFO Inventory = LIFO Inventory + LIFO Reserve; FIFO COGS = LIFO COGS − Δ LIFO Reserve. Apply this lens whenever you screen US industrials against international peers (IFRS bans LIFO, so non-US peers are FIFO by default). AI prompt: "Pull this company's LIFO reserve from the latest 10-K and tell me what its inventory and gross profit would look like under FIFO. By what percentage is reported inventory understated?"
Sit with the ideas.
A company uses LIFO. Its LIFO inventory is $100,000 and the LIFO Reserve is $30,000. LIFO COGS is $500,000 and the change in LIFO Reserve this year was +$10,000. What would inventory and COGS be under FIFO?