FIFO versus LIFO confuses sellers because it is two different questions wearing one vocabulary: the PHYSICAL question (which units leave the shelf first) and the ACCOUNTING question (which cost gets booked when a unit sells). The answers are independent, and small online sellers usually want a boring pair: rotate FIFO physically, and let an accountant pick the valuation method your jurisdiction supports.
The physical question: rotate FIFO, almost always
First-in-first-out rotation, oldest units ship first, is the right physical policy for nearly every catalog:
- Anything that ages: expiry dates, batteries, adhesives, cosmetics, obviously.
- Anything with packaging generations: old boxes ship before the redesign, so the catalog photo mismatch window stays short.
- Everything else too: even durable goods accumulate shelf wear, and FIFO rotation keeps dead-stock formation visible, the oldest units surfacing instead of fossilizing at the back.
The mechanics at small scale are shelving discipline, not software: new stock shelves BEHIND existing stock at receiving, pickers take from the front. Batch or lot tracking (where expiry matters) adds a date to the bin label, the SKU stays the identity; the lot is an attribute.
The accounting question: valuation method
When a unit sells, which purchase cost becomes COGS? FIFO valuation books the oldest cost; LIFO books the newest; weighted average blends. In inflationary periods, LIFO books higher COGS (newest = priciest), lowering paper profit and current tax, which is exactly why LIFO is restricted: it is permitted under US GAAP, disallowed under IFRS and in most jurisdictions outside the US. Three practical truths for small sellers:
- Your physical rotation does not constrain your valuation method. You can rotate FIFO and value weighted-average; the books and the shelf answer different questions.
- Method changes are formal events with tax consequences, chosen once with an accountant, not toggled per quarter.
- Consistency beats optimization at small scale: the margin insight you need day-to-day comes from per-SKU velocity and margin data, not from valuation gymnastics.
What this means operationally
- COGS accuracy depends on purchase records: unit costs per PO recorded at receiving are what any valuation method computes from. Sloppy cost capture makes every method wrong identically.
- Repricing decisions use replacement cost, what the NEXT unit will cost you, regardless of which historical cost the books assign, the per-channel pricing math runs on tomorrow’s costs, not yesterday’s.
- Perpetual records make any method easier: a live unit ledger gives the accountant clean inputs, whichever valuation they apply on top.
Common questions
Which method shows higher profit?
In rising-cost periods, FIFO valuation books lower COGS and higher paper profit; LIFO the reverse. Falling costs flip it. This is presentation, not cash, the units cost what they cost.
Can I use LIFO outside the United States?
Generally no (IFRS disallows it). US sellers under GAAP can, with conformity rules attached. This is precisely the ask-your-accountant line.
Does my inventory software decide the method?
It should record per-purchase costs and quantities cleanly; valuation is applied in your accounting layer. Beware tools that silently hardcode one method into your reports.
What about specific identification for one-offs?
Unique items (art, vintage, serials) can book their exact cost per unit, the natural method for quantity-1 catalogs, and the bookkeeping matches how the products actually behave.
Clean inputs, whichever method
Counts and costs recorded once and synced everywhere, the raw material any valuation method needs, from $49/month with unlimited orders, with per-SKU velocity on the plans above. See pricing.