LIFO inventory method
The LIFO inventory method assumes the most recently purchased units are sold first, so cost of goods sold reflects recent prices while closing stock carries older costs. It is permitted under US GAAP but prohibited by IFRS.
FrameworkInventory costing
What it is
See it move
Opening stock is 100 units at €10; a purchase adds 200 units at €14; then 180 units are sold. LIFO costs those sales from the newest layer first: cost of goods sold of €2,520 and closing stock of €1,280. FIFO costs the same sale from the oldest layer: cost of goods sold of only €2,120 and closing stock of €1,680.
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
HGB explicitly allows last-in first-out as a permitted cost-flow assumption, and because German commercial and tax accounts are closely linked, companies have used it in both. Under LIFO the most recent, typically higher, purchase costs flow into cost of goods sold, while the oldest and often lower costs remain in closing inventory. In a period of rising prices this depresses reported profit and holds the balance sheet value of stock below its current replacement cost, which historically made the method attractive for its cash-tax effect.
IFRS
IAS 2 does not accept LIFO at all; the only cost formulas permitted are first-in first-out and weighted-average cost. The standard-setters' objection is that LIFO can leave inventory on the balance sheet at outdated prices far removed from current value. A company moving from HGB to IFRS must therefore restate any LIFO-based inventory onto a FIFO or weighted-average basis, which in an inflationary environment usually raises the reported inventory figure and increases opening retained earnings.
Edlintics’ own explanatory summary — not official IFRS Foundation or national standard-setter guidance.
Check yourself
In a period of rising purchase prices, which statement correctly describes the effect of using LIFO compared with FIFO?