What is LIFO (Last-In, First-Out)
LIFO (Last-In-First-Out) is an inventory valuation and management method where the most recently acquired items are sold first. For ecommerce stores, this means recording your newest stock as sold before older inventory, directly impacting your Cost of Goods Sold (COGS) and gross profit.
How Do You Calculate LIFO?
The Last-In-First-Out (LIFO) method calculates your COGS by assigning the cost of your most recently purchased inventory to your most recent sales. This approach reflects how newer, often higher-priced goods move first, especially during inflation.
This is the LIFO Formula:
COGS = Amount of most recent items sold × Their original purchase cost
Under LIFO, you assume your latest inventory purchases sell first. Once that batch runs out, you apply the cost per item from the next newest batch. This ensures your accounting reflects the most current inventory costs rather than older, potentially outdated prices.
What Is an Example of LIFO in Action?
Imagine your Shopify store sells ceramic vases.
- In Q1, you purchase 10 vases at $50 each and sell five.
- In Q2, you buy 20 more at $100 each and sell 13.
Using the LIFO method, you assume the newest stock is sold first:
- 10 × $100 = $1,000
- 3 × $50 = $150
Total COGS = $1,150
If you’d used FIFO instead, your older $50 stock would have been recognized first, resulting in a lower COGS and higher reported profit. LIFO increases your reported costs during inflation, which can lower taxable income but also reduce your gross profit on paper.
When using an ecommerce accounting integration such as MyWorks, LIFO inventory values automatically sync, ensuring your QuickBooks or Xero reports consistently show accurate batch costs.
What Are the Pros and Cons of LIFO?
Pros:
• Can reduce taxable income during inflationary periods
• Matches recent purchase costs more closely with current selling prices
• Useful for businesses managing durable or long-shelf-life products
Cons:
• Not ideal for perishable or fast-moving inventory
• May lead to undervalued or outdated stock records
• Not permitted under IFRS and most international accounting standards
• Can distort short-term profitability and inventory visibility
Because of these limitations, most ecommerce businesses rely on FIFO instead. Still, MyWorks supports both inventory valuation methods, ensuring your accounting data remains consistent regardless of your approach.
When Should Businesses Use the LIFO Method?
Only US businesses should use the LIFO method under generally accepted accounting principles (GAAP). That means you must disclose you’re using it and apply it consistently. Outside the US, LIFO is generally not permitted. Many countries don’t allow this method because it can distort financial statements and doesn’t reflect your real inventory practices. In these cases, it’s better to use the FIFO over the LIFO method.
LIFO works best for durable, non-perishable products with slow turnover, such as metals, furniture, or collectibles, where older inventory retains its value over time. If your ecommerce business operates internationally or sells perishable goods, FIFO is typically the better fit.