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FIFO and LIFO accounting are methods used in managing inventory and financial matters that can have profound effects on your taxes, income, logistics and profitability.

First In, first out - means that the goods first added to inventory are assumed to be the first goods removed from inventory for sale. Last in, first out - means that the most recent goods , or last goods added to inventory are assumed to be the first goods removed from inventory for sale. Since the First-In, First-Out (FIFO) method assumes that the first unit making its way into inventory, FIFO leaves the newer, more expensive inventory to increase in price. As a result, FIFO can increase net income because inventory that might be several years old-which was acquired for a lower cost-is used to value COGS. Under Last-in, First out, the cost of goods includes the more expensive items while ending inventory includes the less expensive items. This means that the net income and ending balance amounts are lower under the LIFO method.