LIFO vs FIFO

Under FIFO, the first units purchased are the first ones expensed to COGS, so ending inventory reflects the most RECENT (current) costs. Under LIFO, the most recently purchased units are expensed first, so COGS reflects current costs while ending inventory is left holding OLD costs. The physical flow of goods doesn't have to match — these are cost-flow assumptions, not warehouse rules. A grocery store may physically sell oldest-first but still use LIFO for accounting.

Interviews almost always assume inflation. With rising prices: LIFO expenses the newest, most expensive units → higher COGS → lower gross profit → lower net income → LOWER taxes (the key benefit) → but inventory on the balance sheet is understated (stuck at old, low costs). FIFO expenses the oldest, cheapest units → lower COGS → higher net income → HIGHER taxes → but inventory better reflects current replacement cost. Flip everything if prices are falling. LIFO's main appeal is the cash-tax saving during inflation.

LIFO is permitted under U.S. GAAP but PROHIBITED under IFRS, so global comparability favors FIFO. U.S. companies using LIFO must disclose a 'LIFO reserve' — the difference between LIFO and FIFO inventory — so analysts can convert LIFO figures to a FIFO basis for apples-to-apples comparison. Watch for 'LIFO liquidation': if a LIFO firm sells more than it buys, it dips into old low-cost layers, temporarily spiking profit and taxes — a low-quality earnings signal.