GAAP
GAAP (generally accepted accounting principles) is the rule book a company follows to prepare its financial statements. US GAAP is a detailed, rules-based codification, contrasted with the more principles-based IFRS used across Europe.
What it is
See it move
A company buys 200 units at €8 and 300 at €11, then sells 400 for €15,000. Under FIFO, cost of goods sold is 200×€8 + 200×€11 = €3,800, giving €11,200 gross profit. Under LIFO, cost of goods sold is 300×€11 + 100×€8 = €4,100, giving €10,900 — €300 lower, purely from the costing method allowed.
Check yourself
A US company switches its inventory costing method from first-in-first-out to last-in-first-out, which is permitted under US GAAP but not under IFRS. During a period of rising prices it purchases 150 units at €10 each, then 250 units at €14 each, and sells 300 units for total revenue of €12,000. What is the effect on reported gross profit of using last-in-first-out instead of first-in-first-out?