Inventory Turnover › LIFO vs FIFO
LIFO vs FIFO in Retail: US GAAP, IRS Rules, and Retailer Choices
Inventory accounting method affects reported COGS, gross margin, ending inventory value, and tax liability. US GAAP permits FIFO, LIFO, and weighted average. IFRS prohibits LIFO. The IRS LIFO conformity rule means a US retailer using LIFO for tax must also use it for financial reporting.
The three permitted methods
FIFO (First-In, First-Out)
Oldest costs flow through COGS first; newest costs remain in ending inventory. In an inflationary environment, FIFO produces higher reported gross margin and higher ending inventory carrying value.
Permitted under both US GAAP (ASC 330) and IFRS (IAS 2).
LIFO (Last-In, First-Out)
Newest costs flow through COGS first; oldest costs remain in ending inventory. In an inflationary environment, LIFO produces lower reported gross margin, lower ending inventory carrying value, and lower current taxes.
Permitted under US GAAP. Prohibited under IFRS. The IRS conformity rule (IRC Section 472) requires consistent book and tax use.
Weighted Average Cost
A single average cost is used for both COGS and ending inventory. Smooths out cost fluctuations; common for commodity-style retailers.
Permitted under both US GAAP and IFRS.
Named retailer choices (disclosed in 10-Ks)
| Retailer | Method | Source |
|---|---|---|
| Walmart | LIFO (US), FIFO (international) | Disclosed in 10-K Note 1. |
| Costco | LIFO (US), weighted avg (foreign) | Disclosed in 10-K Note 1. |
| Target | Retail inventory method, primarily LIFO | Disclosed in 10-K. |
| Home Depot | FIFO | Disclosed in 10-K Note 1. |
| Best Buy | Weighted average cost | Disclosed in 10-K. |
| Kroger | LIFO for the majority | Disclosed in 10-K. |
| Lululemon | Weighted average cost | Disclosed in 10-K. |
| Nike | FIFO and weighted average | Disclosed in 10-K. |
| AutoZone | LIFO | Disclosed in 10-K. |
Source: Company 10-K filings, accounting policies footnote. SEC EDGAR.
Standards and rules
- US GAAP: FASB ASC 330 Inventory. Permits FIFO, LIFO, weighted average, retail method. Requires lower of cost or market (LCM) for LIFO; lower of cost or net realisable value (LCNRV) for non-LIFO.
- IFRS: IAS 2 Inventories. Permits FIFO and weighted average only. LIFO prohibited.
- US tax (IRS): IRS Publication 538. IRC Section 472 establishes the LIFO conformity rule: if LIFO is used for tax, it must be used for financial reporting.
- Retail Inventory Method: A specific application permitted under ASC 330 used by Target, Macys, and others. Tracks inventory at retail price; cost is derived using a cost-to-retail ratio.
Impact on inventory turnover comparison
A LIFO retailer reports lower ending inventory than a FIFO retailer in an inflationary environment. Same physical stock, lower book carrying value, higher reported turnover. To compare like for like:
- Pull the LIFO reserve from the inventory note in the 10-K.
- Add the LIFO reserve back to ending inventory to derive a FIFO-equivalent figure.
- Recalculate average inventory and turnover with the adjustment.
For Walmart, the adjustment typically reduces reported turnover by approximately 0.3-0.5x. For commodity-heavy operators (Kroger, Costco), the adjustment can be larger when input prices have moved meaningfully.