Inventory value accounting definition

First, it's important to remember that these methods are for accounting purposes, not for physical management of inventory, and they do not influence cash flow.

FIFO: First-in, first-out
This method of valuing inventories assumes that first-acquired inventories (and their cost) were used first in production and later-acquired inventories are being held for future use. This is commonly used.

LIFO: Last-in, first-out
This method of valuing inventories assumes that last-acquired inventories (and their cost) were used first in production and first-acquired inventories are being held for future use. This method tends to devalue inventory and has been banned in some countries such as the UK.

Example: A can of beans is put into inventory in January at $1 cost of goods. By July the cost of beans is $1.50. The selling price in July is $2.00 and the January inventory is being sold. Under FIFO, the cost of goods is $1 for a gross margin of $1 ($2 minus $1). Under LIFO the cost of goods is $1.50 for a gross margin of $0.50 ($2 minus $1.50). The cash flow is the same but the taxable income is reduced by LIFO.

Talk with your CPA about which is best for you.