LIFO, short for last in, first out, is an inventory costing method that charges the most recently purchased units' cost to cost of goods sold first, leaving the oldest costs in ending inventory. It is a cost-flow assumption for the books, not a description of which physical units ship, and when purchase costs are rising it produces higher COGS and lower reported profit than FIFO.
LIFO's appeal is arithmetic. When each new purchase order costs more than the last, LIFO books the expensive units as sold first. Gross profit falls, and so does taxable income in that year. That is why the method survives in US practice among some manufacturers, distributors, and retailers with deep, stable product lines.
It comes with conditions that most ecommerce sellers find expensive.
The conformity rule. A taxpayer that elects LIFO for federal income tax must also use it in financial statements issued to owners and creditors, with limited exceptions in Treasury Regulation 1.472-2(e). The IRS describes this in its LIFO conformity practice unit. A seller cannot show the bank FIFO profits and the IRS LIFO profits.
The election. LIFO is elected under Internal Revenue Code section 472 by filing Form 970 with the return for the first year it applies, per the IRS's Form 970 page. Leaving it later is a change in accounting method, which runs through Form 3115.
IFRS does not allow it. IAS 2 permits FIFO or weighted average cost for interchangeable inventory; the IASB removed LIFO as an option, according to its basis for conclusions on IAS 2. A seller owned by, or planning to sell to, a group reporting under IFRS will have to restate.
A different write-down test. Under FASB's ASU 2015-11, inventory on FIFO or average cost is measured at the lower of cost and net realizable value. Inventory on LIFO kept the older lower of cost or market test, which is more complicated to apply.
SKU churn. This is the ecommerce-specific problem. LIFO's benefit sits in old cost layers that stay on the balance sheet year after year. A seller whose catalog turns over every 18 months keeps selling through and discontinuing products, which liquidates those old layers and hands the deferred profit back. The worked example shows how.
Illustrative numbers. Take a seller with one SKU and three purchase orders in a year when tariffs raised landed cost each time:
The seller sells 2,000 units in the year at $30.00, for revenue of $60,000.
Under FIFO, the first 2,000 units bought are the first sold. COGS is 1,000 times $10 plus 1,000 times $12, or $22,000. Ending inventory is the September layer: 1,000 times $14, or $14,000. Gross profit is $60,000 minus $22,000, or $38,000.
Under LIFO, the last 2,000 units bought are the first sold. COGS is 1,000 times $14 plus 1,000 times $12, or $26,000. Ending inventory is the January layer: 1,000 times $10, or $10,000. Gross profit is $60,000 minus $26,000, or $34,000.
LIFO reports $4,000 less profit. That $4,000 is also the gap between the two ending inventory values ($14,000 minus $10,000), which accountants call the LIFO reserve.
Now the next year. The seller discontinues the SKU and sells the last 1,000 units at $30.00, for $30,000.
LIFO now reports $4,000 more. Across both years, total COGS is $36,000 either way ($22,000 plus $14,000 under FIFO, $26,000 plus $10,000 under LIFO). LIFO moved profit from year one to year two. For a seller whose products live two or three years, that is the whole benefit, bought at the price of a second set of layer calculations and the conformity rule.
Whether a deferral like that is worth it for your business is a tax question. A CPA can model it against your purchase history; the ecommerce accountant directory lists firms that work with marketplace sellers.
ConnectBooks inventory values stock on FIFO, with landed cost (freight, duty, and other costs) allocated to each purchase layer, and calculates COGS per unit as goods sell. It does not offer LIFO. A seller on LIFO for tax would need the LIFO calculation maintained separately, usually by the CPA, with FIFO layers as the starting data.
No. LIFO is a cost assumption, not a picking rule. Your warehouse or Amazon can ship whatever unit is closest to the door. The method only decides which purchase cost the books assign to each sale.
Rising costs are when LIFO's arithmetic helps, and the tariff impact guide covers how landed cost has moved. But the benefit only holds while you keep buying the same items. If costs fall later, or the SKU is discontinued, it reverses.
Method choices can differ by type of goods, but splitting by sales channel for the same product is not how the rules are framed, and the conformity rule still applies. Ask a CPA before mixing methods.
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