TLDR:
Last In, First Out (LIFO) is an inventory accounting method in which the most recently acquired items are recorded as sold first, affecting cost of goods sold, taxable income, and balance sheet inventory values.
LIFO vs. FIFO
The two principal inventory methods are LIFO (most recent cost flows to COGS) and FIFO (first in, first out — earliest cost flows to COGS). In a period of rising prices, LIFO produces higher COGS, lower reported profit, lower taxes, and lower ending inventory values. FIFO produces the opposite. The choice between LIFO and FIFO is one of the most consequential accounting policy decisions for inventory-heavy businesses.
Jurisdictional Differences
LIFO is permitted under US GAAP but prohibited under IFRS, meaning multinational companies often maintain different inventory accounting for their US tax filings and consolidated IFRS reporting. Türkiye follows IFRS-aligned standards and does not generally permit LIFO for tax purposes. Companies considering a US-Türkiye structure must understand which inventory method governs which set of books.
LIFO Reserve and LIFO Liquidation
The “LIFO reserve” is the difference between LIFO and FIFO inventory values — a disclosure item that allows analysts to compare LIFO-reporting companies to FIFO peers. “LIFO liquidation” occurs when a company sells more inventory than it acquires, dipping into older, cheaper inventory layers and producing artificially high reported profits in that period. LIFO liquidation is a red flag for sustainability of margins.
Practical Relevance
LIFO matters most in industries with significant inventory and price volatility — oil and gas, commodities, certain industrial manufacturing. Pure-software and services businesses typically don’t use either LIFO or FIFO in any meaningful way since they don’t hold inventory.