Last In, First Out (LIFO)

Last In, First Out (LIFO) is an inventory valuation method that assumes the most recently purchased or produced items are sold first. Under this approach, the newest inventory costs are matched against current revenue, while older inventory costs remain on the balance sheet. LIFO is primarily used for accounting and tax purposes rather than reflecting the actual physical flow of goods.

Why it matters for e-commerce brands

During periods of inflation, LIFO can reduce taxable income since newer, higher-cost inventory is recorded as sold first, resulting in higher cost of goods sold and lower reported profits. However, it's important to note that LIFO is not permitted under International Financial Reporting Standards (IFRS) and is mainly used in the United States under Generally Accepted Accounting Principles (GAAP). E-commerce businesses expanding internationally need to understand these accounting restrictions when managing their inventory valuation strategies.

Example

A Shopify store selling phone cases purchases 100 units in January at $5 each, then buys another 100 units in March at $7 each due to supplier price increases. When the store sells 100 units in April, LIFO accounting records the cost of goods sold as $700 (100 units × $7), using the March purchase price. The remaining inventory on the balance sheet would be valued at $500 (100 units × $5 from January). If the same store used FIFO instead, the cost of goods sold would be $500, and remaining inventory would be $700, resulting in higher reported profits but also higher tax liability.

Related terms

• First In, First Out (FIFO)
• Weighted Average Cost
• Cost of Goods Sold (COGS)
• Inventory Valuation
• Perpetual Inventory System