What is the difference between FIFO (First In First Out) and LIFO (Last In First Out)?

The main difference is: Goods purchased FIRST are sold/used FIRST vs Goods purchased LAST are sold/used FIRST. See the full table for 5 more differences.

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FIFO vs LIFO Inventory Valuation: CA Foundation Accounts

The choice of inventory valuation method significantly affects Gross Profit, closing stock value, and reported income. FIFO and LIFO represent opposite assumptions about the flow of goods.

head-to-Head Comparison

Basis	FIFO (First In First Out)	LIFO (Last In First Out)
Core Assumption	Goods purchased FIRST are sold/used FIRST	Goods purchased LAST are sold/used FIRST
Closing Stock Valuation	Valued at LATEST (most recent) purchase prices	Valued at OLDEST (earliest) purchase prices
COGS during Inflation	Lower COGS (older, cheaper prices used) → Higher Gross Profit	Higher COGS (recent, costlier prices used) → Lower Gross Profit
Closing Stock during Inflation	Higher (valued at recent higher prices)	Lower (valued at older lower prices)
Acceptance	Accepted under Indian Accounting Standards (Ind AS 2) and IFRS	NOT permitted under Ind AS 2 / IFRS; allowed under US GAAP

The 'LIFO is Banned in India' Trap

LIFO is prohibited under Indian Accounting Standards (Ind AS 2 / AS 2) and under IFRS. However, it is still allowed under US GAAP. In the CA Foundation exam, if a question asks which method is 'not permitted' in India, the answer is LIFO. Do not confuse this with tax treatment.

Common Ground (Similarities)

Both are methods for determining the cost of inventory consumed (COGS) and closing stock.
Both result in the same total cost of goods available for sale.
Both affect the Balance Sheet (closing stock value) and P&L Account (Gross Profit) simultaneously.

Test Your Understanding

Q1: During a period of rising prices, FIFO will result in:

Lower Gross Profit than LIFO

Same Gross Profit as LIFO

Higher Gross Profit than LIFO ✅

Zero Gross Profit

Explanation: FIFO uses cheaper (older) costs for COGS. Lower COGS means higher Gross Profit during inflation.

Q2: Under Indian Accounting Standards (Ind AS 2), which method is NOT permitted?

FIFO

Weighted Average

LIFO ✅

Specific Identification

Explanation: Ind AS 2 (Inventories) explicitly prohibits the LIFO method for valuing inventories in India.

"FIFO = First bought, first sold; Closing stock at recent prices; Ind AS compliant. LIFO = Last bought, first sold; Closing stock at old prices; NOT permitted in India."