LIFO and FIFO are two ways to calculate the cost of goods sold. LIFO, or last in first out, assumes that you sell your newest inventory first. FIFO, or first in last out, assumes that you sell your oldest inventory first. Since prices generally rise, using LIFO usually keeps your inventory value lower by selling off the newer, higher priced inventory first. If you've got your own business, knowing how to calculate the two different methods makes sure you're calculating your costs correctly.

## LIFO

#### Step 1

Calculate the total cost of your inventory by multiplying the amount you paid for each item in your inventory. For example, assume you sell t-shirts. If you bought 100 for $3 each in January and 200 in February for $4 each, your total cost of inventory would be $1,100.

#### Step 2

Determine the cost of the items you sell by using the cost of the most recently purchased items. For example, if you sell 20 t-shirts, you use 20 from the February at $4 each to determine you've sold $80 worth of inventory.

#### Step 3

Calculate your new inventory value by subtracting the cost of the goods sold from your original inventory value. In this example, subtract $80 from $1,100 to find you have $1,020 left.

## FIFO

#### Step 1

Calculate the total cost of your inventory by multiplying the amount you paid for each item in your inventory. For example, assume you sell t-shirts. If you bought 100 for $3 each in January and 200 in February for $4 each, your total cost of inventory would be $1,100.

#### Step 2

Determine the cost of the items you sell by using the cost of the most recently purchased items. For example, if you sell 20 t-shirts, you use 20 from the January stock at $3 each to determine you've sold $60 worth of inventory.

#### Step 3

Calculate your new inventory value by subtracting the cost of the goods sold from your original inventory value. In this example, subtract $60 from $1,100 to find you have $1,040 left.

#### References

#### Photo Credits

- Hemera Technologies/AbleStock.com/Getty Images

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