Definition
Under ASC 330, inventory cost flow assumptions include first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average. FIFO assigns the oldest costs to cost of goods sold, leaving ending inventory near current cost. LIFO assigns the newest costs to cost of goods sold, leaving older costs in inventory. In rising prices LIFO shows higher cost of sales and lower income. LIFO is allowed under US GAAP but not IFRS, and the federal tax LIFO conformity rule (IRC section 472(c)) generally requires an entity that uses LIFO for tax to use it in its primary financial statements.
Why it matters in an audit or review
Auditors confirm the method is applied consistently, test costing, and review LIFO layers, liquidations, and pools. A LIFO liquidation can produce profit from old, low-cost layers.
Example
(Illustrative) Purchases: 100 units at $10, then 100 at $12. Sales: 100 units. FIFO cost of sales is $1,000 and ending inventory $1,200. LIFO cost of sales is $1,200 and ending inventory $1,000. Pre-tax income is $200 higher under FIFO.
Common mistakes
- Changing methods without preferability support.
- Missing a LIFO layer liquidation in the year-end analysis.
Sources
- FASB ASC 330-10-30, Inventory, cost flow assumptions
- 26 U.S.C. 472, Last-in, first-out inventories (conformity requirement in 472(c))
- IASB, IAS 2, Inventories (LIFO not permitted)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error