FIFO vs LIFO decides which purchase cost goes to each sale: the oldest (first in, first out) or the newest (last in, first out). When prices rise, FIFO reports a lower cost of goods sold and a higher profit, and LIFO the reverse. IFRS, the standard used in Nigeria, Kenya, Ghana and Uganda, allows FIFO and bans LIFO.
The gap between them is timing, not money. The cash you paid and received is the same under both, and the difference reverses once the stock runs down. This guide works both methods through one quarter of rice in Nigerian naira, then shows who may use LIFO at all.
| FIFO (first in, first out) | LIFO (last in, first out) | |
|---|---|---|
| Cost charged to each sale | The oldest purchase cost still in stock | The newest purchase cost |
| Closing stock carries | The newest costs, close to today's prices | The oldest costs, sometimes years old |
| When prices rise | Lower cost of goods sold, higher profit | Higher cost of goods sold, lower profit |
| When prices fall | Higher cost of goods sold, lower profit | Lower cost of goods sold, higher profit |
| Tax on profit while prices rise | Higher now | Lower now, higher when stock runs down |
| IFRS and IFRS for SMEs | Allowed | Not allowed |
| US GAAP | Allowed | Allowed |
What is FIFO (first in, first out)?
FIFO is a cost formula that charges each sale with the cost of the oldest units still in stock. The units left at the end carry the most recent purchase costs, so closing stock sits close to current prices.
The IFRS Foundation's module on inventories for SMEs puts it the same way. FIFO "assumes that the items of inventory that were purchased or produced first are sold first". It is one of the two formulas IFRS allows for goods that are interchangeable.
The other is weighted average cost, which lands between FIFO and LIFO when prices move one way. It is worked through, with specific identification, in inventory valuation methods.
FIFO is a rule about cost, not about shelves. Rotate perishables by expiry date whatever your books use. That is first expired, first out, and shelf life management covers it.
What is LIFO (last in, first out)?
LIFO is a cost formula that charges each sale with the cost of the newest units bought. The units left at the end carry the oldest costs, which can be years out of date.
IFRS does not allow it. In KPMG's comparison of IFRS and US GAAP, the standard-setter's reason is that LIFO "does not faithfully represent inventory flow patterns". IFRS for SMEs says it in paragraph 13.18: "The last-in, first-out method (LIFO) is not permitted by this Standard."
LIFO survives under US GAAP, and KPMG notes that some American companies use it "for tax reasons". That tax use is why LIFO still fills so many guides written for American readers.
FIFO vs LIFO worked through a quarter of rising prices
For example, a rice wholesaler in Lagos buys 50 kg bags three times in one quarter, at a higher price each month. She sells 220 bags for NGN 19,800,000 in total. The figures are illustrative, not a real shop's.
| Date | Movement | Bags | Cost per bag (NGN) | Cost (NGN) |
|---|---|---|---|---|
| 1 January | Bought | 100 | 60,000 | 6,000,000 |
| January | Sold | 80 | by method | |
| 1 February | Bought | 100 | 70,000 | 7,000,000 |
| February | Sold | 80 | by method | |
| 1 March | Bought | 100 | 80,000 | 8,000,000 |
| March | Sold | 60 | by method | |
| Quarter | 300 bought, 220 sold, 80 left | 21,000,000 |
| FIFO | LIFO | |
|---|---|---|
| Sales, 220 bags | 19,800,000 | 19,800,000 |
| Cost of goods sold | 14,600,000 | 16,200,000 |
| Gross profit | 5,200,000 | 3,600,000 |
| Closing stock, 80 bags | 6,400,000 | 4,800,000 |
How each figure is worked out
- FIFO: the 220 bags sold are January's 100 at 60,000, February's 100 at 70,000 and 20 of March's at 80,000. The 80 left are March bags at 80,000 each.
- LIFO: the 220 bags are costed from the newest delivery back: 100 at 80,000, 100 at 70,000 and 20 at 60,000. The 80 left carry January's 60,000.
- The check: cost of goods sold plus closing stock is NGN 21,000,000 under both methods, the total she paid for the rice.
FIFO reports NGN 1,600,000 more gross profit. Prices rose by a third between January and March, and FIFO charged the cheaper early bags to the quarter's sales. Sales are the same; only the cost of goods sold, and so the closing stock, differs.
That NGN 1,600,000 is exactly the gap in what the 80 bags left are carried at: 80 × NGN 20,000. FIFO counts the price rise on stock still in the store as this quarter's profit, and LIFO does not.
At a 30% tax rate, the gap is NGN 480,000 of tax this quarter. Putting that tax off is why some American companies choose LIFO.
The gap reverses when the stock runs down
In April she buys no rice and sells the last 80 bags at NGN 90,000 each, for NGN 7,200,000. FIFO charges them at March's 80,000 and LIFO at January's 60,000.
| FIFO | LIFO | |
|---|---|---|
| January to March | 5,200,000 | 3,600,000 |
| April | 800,000 | 2,400,000 |
| Both quarters | 6,000,000 | 6,000,000 |
Over the two quarters, both methods report NGN 6,000,000. LIFO only moved profit, and the tax on it, into the quarter the stock ran down. Accountants call this a LIFO liquidation: old, cheap layers reach cost of sales and lift profit.
LIFO gives two answers, FIFO gives one
LIFO's result changes with how you keep records, and FIFO's does not. Costing each sale when it happens (perpetual) and costing the quarter at its end (periodic) agree under FIFO and disagree under LIFO.
| Method | Each sale costed when made | Quarter costed at its end |
|---|---|---|
| FIFO | 14,600,000 | 14,600,000 |
| LIFO | 15,200,000 | 16,200,000 |
Sale by sale, January's 80 bags can only be costed from January's delivery, because March's has not arrived. Two shops with the same rice and different record-keeping would report different LIFO profits. The two systems are compared in perpetual vs periodic inventory.
Advantages and disadvantages of FIFO
FIFO is accepted almost everywhere and gives one clear answer. Its cost is a higher profit, and a higher tax on profit, while prices climb.
Advantages of FIFO
- Accepted in the accounts and for tax. IFRS, IFRS for SMEs and US GAAP all allow it, and so do the tax rules of Uganda, Ghana and Nigeria.
- A balance sheet close to today's prices. Closing stock carries the latest costs, so its value is near what replacing it would cost.
- One answer. Perpetual and periodic records give the same cost of goods sold, as the table above shows.
- Easy to follow. Costs leave in the order the deliveries came in, which an owner or a tax officer can check against the purchase invoices.
Disadvantages of FIFO
- Higher taxable profit while prices rise. Part of that profit is the price rise on stock you still hold, as the 80 bags showed.
- Margins that flatter you. Cost of sales lags behind the next delivery's price. Price from your latest purchase cost, not the FIFO cost, and check the result with markup and margin.
Advantages and disadvantages of LIFO
LIFO matches cost of sales to current prices, but IFRS, required in more than 140 jurisdictions, shuts it out. For a business in Africa, its disadvantages decide the question.
Advantages of LIFO
- Cost of sales near current prices. The margin shows what restocking will cost you.
- Lower taxable profit while prices rise, where the tax rules accept LIFO, chiefly in the United States.
Disadvantages of LIFO
- Not allowed under IFRS or IFRS for SMEs. Nigeria and South Africa also refuse it for tax, according to PwC's country summaries.
- A balance sheet at old prices. The rice wholesaler's 80 bags show at NGN 4,800,000 when replacing them costs NGN 6,400,000.
- The tax saving comes back. It returns in the period the stock runs down, as April showed.
- Two answers and more records. Results depend on perpetual or periodic costing, and each year's cost layers must be kept.
FIFO vs LIFO: which one should your business use?
If your accounts follow IFRS or IFRS for SMEs, use FIFO or weighted average; LIFO is not an option. The IFRS Foundation's country profiles show where each standard applies. Kenya, for example, requires IFRS for listed companies and permits IFRS for SMEs for the rest.
| Your situation | Use | Why |
|---|---|---|
| Accounts under IFRS or IFRS for SMEs | FIFO or weighted average | LIFO is not permitted (IAS 2; IFRS for SMEs 13.18) |
| Goods that expire, spoil or go out of fashion | FIFO | Cost follows the way the goods leave |
| Identical goods bought often at moving prices: rice, sugar, cement | Weighted average or FIFO | Average smooths each price jump |
| Tax return in Uganda | FIFO or average cost | The only two methods section 46 of the Income Tax Act names |
| Tax return in Nigeria or South Africa | Any method but LIFO | LIFO is not accepted for tax |
| A US business reporting under US GAAP | FIFO or LIFO | US GAAP still allows LIFO |
The Nigerian rule is in PwC's summary of how Nigeria works out taxable income: "last in first out (LIFO) is not permitted". PwC's South Africa summary says LIFO "is not accepted for tax purposes". Uganda's section 46 allows FIFO or average cost where items cannot be told apart (URA's July 2021 reprint).
Whatever you choose, keep it. IFRS for SMEs requires the same formula for all inventories of a similar nature and use. Uganda lets you change method "only with the written permission of the Commissioner".
The choice also moves your tax bill, so read how inventory affects taxes before you settle it with your accountant.
How to see FIFO profit in ArmPOS
ArmPOS costs your sales by FIFO and by average cost, the two formulas IFRS allows for interchangeable goods. It has no LIFO figure. The steps follow the Help center's guides.
- Record each delivery at its own cost. On Purchases › Create Purchase, each line shows its Net Unit Cost, and the pencil changes the Product Cost for that purchase. Stock enters the warehouse when the Status is received.
- Read both profits. Reports › Profit and Loss ends with Net Profit (FIFO), which costs the oldest stock first, and Net Profit (Average Cost). Read the one your accountant uses, every time.
- Check what the stock is worth. Reports › Inventory Valuation multiplies each product's Stock on Hand by its Cost to give its Asset Value.
- Post the cost of sales, if you use Accounting. The ledger's Inventory account rises with every purchase, but no cost of goods sold is posted to it. Post it as a journal entry at month end (Chart of accounts and journal entries).
Inventory Valuation uses one cost per product, not a stack of FIFO layers. After a big price move its total can differ from a FIFO stock figure, so ask your accountant to check the year-end number. ArmPOS works the same way for shops in Nigeria.
Frequently asked questions
Which is better, FIFO or LIFO?
For a business reporting under IFRS or IFRS for SMEs, FIFO, because LIFO is not allowed. Under US GAAP, LIFO lowers taxable profit while prices rise, at the price of an out-of-date balance sheet and a saving that reverses.
Does LIFO reduce taxes?
Only where the tax rules accept it, mainly in the United States, and only while prices rise and stock does not run down. Nigeria and South Africa do not accept LIFO for tax, and Uganda's Income Tax Act names only FIFO and average cost.
Why does FIFO show a higher profit when prices rise?
Because the cheap early units go to cost of sales and the dear recent ones stay in stock. In the rice example, FIFO's extra NGN 1,600,000 equals the price rise on the 80 bags left.
What happens to FIFO and LIFO when prices fall?
The effects flip. FIFO charges the older, dearer units to sales and shows the lower profit, while LIFO shows the higher one.
Is FIFO the same as first expired, first out?
No. FIFO decides which cost goes to a sale; first expired, first out decides which item leaves the shelf. A shop can use FIFO in its books and still pick by expiry date.
See your FIFO profit beside average cost without a spreadsheet. Create a free ArmPOS account, add each product with its cost and record your next delivery as a purchase. The Starter plan is free and needs no card.
