FIFO and LIFO are inventory cost-flow methods; IFRS bans LIFO, US GAAP allows it.
What it is
FIFO (first-in, first-out) and LIFO (last-in, first-out) are accounting assumptions for which inventory costs flow into cost of goods sold (COGS) when items are sold — they need not match the physical order goods leave the shelf. FIFO sends the oldest purchase costs to COGS, leaving newer costs on the balance sheet; LIFO sends the newest costs to COGS, leaving older costs in inventory. There is also a weighted-average method that blends the two. The choice affects reported COGS, gross profit, ending inventory, and taxes.
Why it matters
When prices are rising, FIFO reports lower COGS and higher profit (and a higher tax bill), while LIFO reports higher COGS, lower profit, and lower taxable income — which is exactly why some U.S. firms elect LIFO. The pitfall: a U.S. company on LIFO can look less profitable and carry understated inventory versus an otherwise identical IFRS peer on FIFO, so taking reported margins or book inventory at face value across borders is misleading. LIFO also leaves stale, decades-old costs sitting in inventory on the balance sheet.
How it's calculated
There is no single formula; you tag each unit sold with a cost based on the assumed flow. Under FIFO, COGS uses the cost of the earliest units acquired; under LIFO, it uses the cost of the most recent units; ending inventory is then whatever costs remain. U.S. LIFO filers also disclose a LIFO reserve — the dollar gap between LIFO and FIFO inventory — which analysts add back to convert a LIFO company to a FIFO basis for fair comparison.
How Quintarthai uses it
The inventory, COGS, and gross-margin figures on a company's deep-analysis page come straight from each filer's own statements, so a U.S. LIFO name and a Canadian FIFO name reflect their chosen methods — check the filing footnotes for the LIFO reserve before comparing margins. See the Knowledge Base for related inventory metrics.
Cross-border note. This is a core Canada-vs-U.S. comparability trap: IFRS (IAS 2), which Canadian public companies use, prohibits LIFO, so Canadian filers use FIFO or weighted-average; U.S. GAAP still permits LIFO. A U.S. firm electing LIFO must also use it for financial reporting under the IRC Section 472(c) conformity rule, and discloses a LIFO reserve you can use to restate it to FIFO before comparing it to a Canadian peer.
FAQ
Why would a U.S. company choose LIFO if it lowers reported profit?
To cut taxes. When prices rise, LIFO pushes the newest, higher costs into COGS, which shrinks taxable income and the cash tax bill. The trade-off is lower reported earnings and an inventory value on the balance sheet that can be badly understated versus current replacement cost.
How do I compare a U.S. LIFO company to a Canadian FIFO company?
Convert the LIFO company to a FIFO basis using the LIFO reserve it discloses in its filing footnotes: add the reserve to inventory and adjust COGS by the change in the reserve. Then inventory, gross margin, and turnover are on the same footing for an apples-to-apples comparison.
Check your understanding
Two near-identical retailers face rising costs. Maple Co. is a Canadian IFRS filer; Cedar Inc. is a U.S. GAAP filer that elects LIFO. What should you expect when comparing their latest statements?
In inflation LIFO loads the newest higher costs into COGS, lowering Cedar's profit and leaving older, lower costs in inventory, so its inventory can be understated; IFRS bans LIFO, so Maple cannot use it.