Inventory glossary

What is LIFO?

LIFO (last in, first out) is an inventory valuation method where the most recently purchased stock is counted as the first stock sold.

LIFO changes how you value cost of goods sold and ending inventory on paper. In times of rising supplier prices, LIFO pushes higher recent costs into cost of goods sold, which lowers reported profit and taxable income. It does not describe which physical boxes you actually pull off the shelf first.

Most small Shopify stores do not use LIFO because it is not accepted under many accounting standards outside the US, and it complicates inventory accounting for little benefit at small volume. If your accountant has not raised it, you are probably on FIFO or average cost already and that is fine.

Formula

COGS (LIFO) = cost of the most recently purchased units sold

Example

A candle store buys 100 candles at $4 each in January, then 100 more at $5 each in March. In April it sells 120 candles. Under LIFO, the first 100 sold are costed at $5 (the March batch) and the next 20 at $4 (from January), giving COGS of 100 x $5 + 20 x $4 = $580.

Common mistakes

  • Assuming LIFO means you physically ship the newest stock first, it is only a costing method, not a picking rule.
  • Using LIFO without checking if it is allowed under your country's accounting rules.
  • Mixing up LIFO and FIFO when calculating margin by hand, which throws off profit numbers.

LIFO and SteadyShelf

SteadyShelf forecasts and reorders based on units and lead times, not on which costing method you use for accounting.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

FIFO · Weighted average cost · Inventory valuation · Cost of goods sold · Gross margin

Full inventory glossary

FAQ

Does LIFO affect which stock I physically ship to customers first?

No. LIFO is only an accounting method for costing. What you actually pick and ship can follow any order you choose, like oldest stock first to avoid expiry.

Why would a store choose LIFO over FIFO?

Mainly for tax reasons when supplier costs are rising, since LIFO raises COGS and lowers taxable profit. Small stores rarely use it because of the added complexity and restrictions in many accounting jurisdictions.

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