The inventory cost-flow method changes reported cost of goods sold, ending inventory and taxable income. Enter beginning inventory and purchases to compare FIFO, LIFO and weighted-average results side by side.
How it works
Value cost of goods sold and ending inventory from beginning inventory and purchase layers under FIFO, LIFO and weighted-average cost (periodic system), with the LIFO reserve.
Goods available = Σ Units × Unit cost (beginning inventory + purchases)
FIFO COGS: sold units drawn from the oldest layers first
LIFO COGS: sold units drawn from the newest layers first
Weighted average COGS = Units sold × (Cost available ÷ Units available)
Ending inventory = Goods available − COGSCommon uses
- Choosing or evaluating an inventory costing method
- Calculating the LIFO reserve for financial statement analysis
- Accounting coursework and exam preparation
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Inventory layers (oldest first) | Beginning inventory | 1,200 | 14.00 Purchase Feb 3 | 2,500 | 14.60 Purchase Mar 18 | 1,800 | 15.25 Purchase May 9 | 3,000 | 15.90 Purchase Jun 22 | 1,500 | 16.40 |
| Units sold | 7,400 |
| Selling price per unit | $24 |
| Cost of goods available | $153,050 |
| Weighted-average unit cost | $15.31 |
| LIFO reserve | $4,850 |
| FIFO COGS | $110,960 |
| LIFO COGS | $115,810 |
| Weighted-average COGS | $113,257 |
Costs are rising, so LIFO produces the highest COGS and lowest taxable income. LIFO is permitted under U.S. GAAP but not under IFRS.
Interpreting the results
- Periodic LIFO applies the newest costs for the whole period; perpetual LIFO, applied sale by sale, can give different results.
- A company using LIFO for taxes must also use it for financial reporting under the LIFO conformity rule.
- Inventory is reported at the lower of cost and net realizable value (FIFO and average cost) or the lower of cost or market (LIFO).
Frequently asked questions
Which inventory method gives the lowest taxes?
When costs are rising, LIFO assigns the newest, highest costs to cost of goods sold, which lowers taxable income. When costs are falling, FIFO produces the lower taxable income.
What is the LIFO reserve?
The LIFO reserve is the difference between inventory valued at FIFO and at LIFO. Companies using LIFO disclose it, and analysts add it back to compare LIFO companies with FIFO companies on equal terms.
Can companies use LIFO under IFRS?
No. IFRS prohibits LIFO, permitting only FIFO and weighted-average cost. U.S. GAAP permits LIFO, and companies using it for tax purposes must also use it for financial reporting.
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