What is FIFO vs LIFO vs FEFO?

FIFO, LIFO, and FEFO are inventory management approaches that determine which units are sold or used first, directly affecting how you value inventory and calculate cost of goods sold (COGS).

How Each Method Works

FIFO (First In, First Out) assumes the oldest inventory is sold first. For costing purposes, your earliest, typically lower-cost purchases flow to COGS, while ending inventory is valued at more recent, often higher prices. In an inflationary environment, this produces lower COGS, higher gross profit, and a balance sheet inventory figure closer to current replacement cost. FIFO is required under IFRS and is the most widely used method globally, making it the default for most retail businesses.

LIFO (Last In, First Out) assumes the most recently received inventory sells first. The newest, typically higher-cost purchases flow to COGS, leaving older, cheaper layers on the balance sheet. In a rising-price environment, LIFO produces higher COGS, lower reported profit, and lower taxable income. However, LIFO is permitted only under U.S. GAAP and is prohibited under IFRS, so multinational retailers generally cannot use it.

FEFO (First Expired, First Out) prioritizes expiration date over receipt date: the unit expiring soonest ships or sells first. It is primarily a warehouse and operational policy rather than a standalone accounting valuation method, and it is typically paired with FIFO cost flow for financial reporting. FEFO is standard in food, pharmaceutical, cosmetics, and medical supply retail, where spoilage and regulatory compliance are central concerns.

Why It Matters for Inventory Appraisal

The method your business uses shapes the carrying value of inventory on your balance sheet, which directly affects how an appraiser analyzes your stock. A professional inventory appraisal accounts for your costing methodology alongside current market data to produce a defensible valuation. For more on how appraisers categorize and prioritize inventory, see our FAQ on the ABC method of inventory.