FIFO vs LIFO: How Each Works and When to Pick One

By Virginia Miller

June 26, 2026

In this article:

FIFO ("first in, first out") and LIFO ("last in, first out") are two ways of accounting for which units of inventory you consider sold first. They're both legitimate; they produce different cost-of-goods-sold numbers, which produces different tax bills. They also imply different things at the warehouse — FIFO usually means physical rotation, while LIFO is mostly an accounting choice. This piece covers when each makes sense for an ecommerce brand and which decisions are actually warehouse-driven vs. CFO-driven.

How FIFO and LIFO actually work

FIFO assumes the first units in are the first units sold. LIFO assumes the opposite — newest units sold first. The pick is an accounting election, not a warehouse rule, but in practice FIFO usually does drive physical rotation (especially for anything with a shelf life), while LIFO is mostly a tax-and-COGS choice. The rest of this piece walks through what each one does to your numbers, when each is legal, and what your warehouse has to actually do to support either.

LIFO Method: A Primer

The LIFO inventory method assumes that the most recently acquired items are sold first. Since newer units likely have higher costs in inflationary environments, LIFO reduces taxable income compared to FIFO.

Key Benefits of LIFO

Lowers taxable income in inflationary periods
Results in higher cash flow
Keeps latest inventory on hand

Potential Drawbacks

May conflict with international accounting standards
Requires more record-keeping than FIFO
Oldest inventory units remain unsold

FIFO Method: A Primer

The FIFO inventory method assumes the oldest inventory units are sold first, aligning with many products' natural flow. FIFO matches revenue against oldest costs for increased taxable income in inflation.

Key Benefits of FIFO

Complies with international accounting standards
Simpler record-keeping needs than LIFO
Better matches costs against revenues

Potential Drawbacks

Results in higher taxable income than LIFO
Oldest inventory could expire before selling
Lower cash flow than LIFO in inflation

Running FIFO in the warehouse

FIFO is an accounting election, but for anything with a shelf life it's also a physical job: the oldest unit of a SKU has to ship before a newer one. Three things have to line up for that rotation to hold.

Your warehouse system tracks arrival date per lot, so every unit knows how old it is.
Pick rules sort oldest-lot-first, so a picker pulls the oldest stock without thinking about it.
Someone audits a sample of bins each cycle to catch lots that drifted out of order.

Keeping FIFO honest at peak

High-volume periods are where rotation slips. When orders surge, pickers reach for whatever's closest instead of whatever's oldest. Two things keep FIFO flowing under load: a layout that puts older stock in the easier-to-reach pick face, and pick software that enforces the oldest-lot rule instead of leaving it to judgment.

Choosing the Best Method

There's no universally "best" inventory method. The optimum approach depends on your business's specific needs and goals. However, understanding the pros and cons of LIFO and FIFO allows an informed decision.

Most ecommerce brands don't run their own warehouse, so the accounting choice stays with your books while the physical rotation falls to whoever ships your orders. If you'd rather hand off oldest-lot-first rotation entirely, talk to us.

Frequently Asked Questions

What is LIFO inventory management?

LIFO stands for Last-In, First-Out. With LIFO, items most recently added to inventory are sold first. LIFO reduces taxable income in inflationary environments.

What is FIFO inventory management?

FIFO stands for First-In, First-Out. With FIFO, the oldest inventory items are sold first, matching revenue against oldest costs. FIFO increases taxable income during inflation.

Is LIFO better than FIFO?

There is no universally "best" method. LIFO is better for tax reduction purposes in inflationary periods. FIFO complies with more accounting standards globally.

When should I use LIFO vs FIFO?

Use LIFO if reducing taxable income is a priority. Use FIFO if accounting standard compliance or matching revenues to oldest costs is preferred.

Can I change inventory methods?

Yes, you can change methods, but may need IRS approval. Record-keeping requirements also change, so prepare systems and staff for the switch.

What industries use LIFO inventory management?

LIFO is common in industries with rising raw materials costs, including oil, lumber, jewelry, and automobile manufacturing.

What industries use FIFO inventory management?

FIFO is typical for perishable goods like food, pharmaceuticals, and retail items where oldest stock should be sold first.

View all

FIFO vs LIFO: How Each Works and When to Pick One

Frequently Asked Questions

What is LIFO inventory management?

What is FIFO inventory management?

Is LIFO better than FIFO?

When should I use LIFO vs FIFO?

Can I change inventory methods?

What industries use LIFO inventory management?

What industries use FIFO inventory management?

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