In this article
Talk to our experts- LIFO
- LIFO (last in, first out) is an inventory costing method that assumes the items a business bought or produced last are the first ones sold, so cost of goods sold carries the newest costs and ending inventory carries the oldest. In the United States, a business adopts LIFO for tax purposes by filing IRS Form 970.
Also called: Last in, first out
How it works
LIFO is the inventory method the IRS describes as assuming the items of inventory you purchased or produced last are the first items you sold, consumed, or otherwise disposed of.
Section 472 of the Internal Revenue Code sets the rule. For the goods named in the LIFO application, the business treats the units on hand at year end as being, first, those included in the opening inventory, in the order of acquisition, and second, those acquired during the year. It inventories them at cost. IRS Publication 538 adds that the lower of cost or market method does not apply to goods accounted for under the LIFO method. It calls the LIFO rules very complex.
Adopting LIFO
- Form 970: file Form 970, Application To Use LIFO Inventory Method, or a statement with the same information, with your tax return for the first tax year you intend to use LIFO.
- Opening inventory at cost: the beginning inventory for the first LIFO year is valued at cost, and any change that causes is taken into account ratably over 3 taxable years.
- Conformity: section 472 applies only if the business shows it used no inventory procedure other than LIFO for those goods to work out its income for the first LIFO year in a report or statement to shareholders, partners, other proprietors or beneficiaries, or for credit purposes.
- Staying on LIFO: once adopted, LIFO is irrevocable unless the IRS allows a change to another method. For the change procedures, Form 970 points to Form 3115, Application for Change in Accounting Method.
As of October 28, 2026, these points come from 26 U.S.C. 472, Form 970 (Rev. November 2020) and IRS Publication 538 (revised January 2022). This is general information, not tax or accounting advice.
Types of LIFO
Form 970 and its instructions cover three approaches:
- Specific goods (unit) method: types of goods in the opening inventory are compared with similar types in the closing inventory, by a unit of measure such as pounds or feet.
- Dollar-value method: goods are grouped into one or more pools. Retailers, wholesalers, jobbers and distributors are required to pool their goods by major lines, types or classes. Generally, the LIFO value of a pool is computed with the double-extension method or the inventory price index computation (IPIC) method.
- Simplified dollar-value method: an eligible small business can elect it, keeping a separate pool for each major category in the applicable government price index.
LIFO vs FIFO
FIFO assumes the oldest items are sold first. The IRS says that when prices are rising, LIFO produces a larger cost of goods sold and a lower closing inventory, and FIFO the reverse. When prices fall, the opposite holds. The IFRS Foundation's summary of IAS 2 Inventories says cost is assigned by specific identification for items that are not ordinarily interchangeable, and by the first-in, first-out or weighted average cost formula for items that are. LIFO is not on that list.
Example
A distributor starts the year with 100 valves at $20. It buys 300 at $22, then 200 at $25, and sells 400.
- Goods available: $2,000 + $6,600 + $5,000 = $13,600.
- LIFO: the 200 units left are the 100 from opening inventory at $20, then 100 of the year's purchases. Costing those in order of acquisition, one of the options on Form 970, they are the first 100 bought at $22. Ending inventory is $2,000 + $2,200 = $4,200, so cost of goods sold is $13,600 minus $4,200 = $9,400.
- FIFO: the 200 units left are the latest 200 at $25 = $5,000, so cost of goods sold is $8,600.
With rising prices, LIFO reports $800 more cost of goods sold.
On Shopify
Shopify lets you add a cost per item to each product or variant: how much it costs you for the product or variant. Profit is reported only for products and variants that had cost recorded at the time they were sold. Shopify notes that the Cost per item field contains static data, and among its options for dynamic reporting it lists running financial reports in another business system, such as an ERP or accounting system.
How Uncap helps
Uncap Connect keeps your store and your ERP in real-time, two-way sync, and your ERP stays the system of record. Inventory, orders, customers, and pricing move the moment they change, not in an overnight batch.
Sources
Frequently asked questions
What is the last in first out (LIFO) method in cost accounting?
LIFO, or last in, first out, assumes the items purchased or produced last are the first items sold. Cost of goods sold carries the newest costs, and the units left at year end are treated as coming first from the opening inventory.
What is the dollar-value LIFO (DVL) method?
Dollar-value LIFO groups goods into pools instead of tracking each item. IRS Form 970 says retailers, wholesalers, jobbers and distributors must pool goods by major lines, types or classes.
Why is LIFO banned?
LIFO is allowed for US federal income tax under 26 U.S.C. 472, adopted on IRS Form 970. The IFRS Foundation's summary of IAS 2 lists specific identification and the first-in, first-out or weighted average cost formula as the ways to assign cost, and LIFO is not among them.
What is an example of LIFO in real life?
A distributor holds 100 valves at $20, buys 300 at $22 and 200 at $25, and sells 400. Under LIFO, with purchases costed in order of acquisition, cost of goods sold is $9,400, compared with $8,600 under FIFO.
