Why last in, first out (LIFO) matters to a first-time founder
The chosen cost method changes reported profit, inventory value and sometimes tax, especially when purchase prices move. LIFO can match recent costs against current revenue, but it is prohibited under IFRS and permitted only in certain jurisdictions, including under US rules. It does not necessarily describe physical stock movement.
Examples of last in, first out (LIFO)
A US retailer buys 100 units at $10, then 100 at $12, and sells 120. Under LIFO, the cost assigned to sales starts with 100 units at $12 and then 20 at $10, producing cost of goods sold of $1,400 before other adjustments.
Common misunderstanding
It does not mean staff must physically ship the newest items first. LIFO is an accounting cost-flow assumption. FIFO assigns the oldest costs to sales first. A company reporting under IFRS cannot use LIFO, even if its warehouse physically moves recently purchased stock before older stock.
When to use it
Use it only where the applicable accounting and tax rules allow it and after assessing consistency, disclosures and systems. US businesses should obtain accounting advice because tax conformity rules can matter. IFRS reporters should use an allowed method such as FIFO or weighted average instead.