Who Uses LIFO? Businesses, Accountants, and Systems Explained

Who uses LIFO?

The short answer: a mix of business managers, accountants, tax professionals, and certain industry sectors — mostly in jurisdictions where LIFO is an accepted accounting method. To understand who chooses LIFO and why, it helps to separate the groups involved and the roles they play.

Business decision-makers

LIFO is typically chosen by companies that want accounting results that reflect more recent purchase costs in their cost of goods sold (COGS). In practice, businesses in industries with large, non-perishable inventories and rising input prices — for example, commodity-based businesses (oil, metals), some wholesale distributors, and certain manufacturers — often evaluate LIFO as a strategic choice. Companies concerned with reducing current taxable income during periods of inflation may favor LIFO because it generally assigns higher recent costs to COGS, lowering reported profit and taxable income.

Accountants and tax professionals

Accountants evaluate the impact of inventory costing methods on financial statements, tax liabilities, and regulatory compliance. Tax professionals advise on how LIFO affects a company's tax position and whether switching methods is advisable, given tax law constraints. In the United States, where LIFO is permitted under U.S. GAAP and U.S. tax law, tax and accounting teams commonly perform cost-benefit analyses, model financial statement effects, and manage documentation requirements such as the LIFO reserve and disclosure rules.

Auditors and regulators

External auditors examine inventory accounting choices to ensure they are applied consistently and conform to accounting standards and tax rules. Regulatory bodies and standard-setters influence who can use LIFO: for example, IFRS (the international accounting standard used by many countries) does not permit LIFO, so companies reporting under IFRS cannot use LIFO. This means multinational firms and firms outside the U.S. are often precluded, narrowing the group of potential LIFO users.

ERP, WMS and software providers

Enterprise resource planning (ERP) and inventory systems include costing method options. IT and systems teams implement and maintain LIFO functionality where required. When a company chooses LIFO, its software must track LIFO layers, calculate LIFO reserves, and support reporting. Warehouse management systems (WMS) typically handle physical operations and may not enforce costing methods — the costing is usually handled at the accounting/ERP level.

Inventory managers and supply chain teams

Operational teams are indirectly affected. In some storage setups (stacked pallets, silos, barrels), physical handling may approximate LIFO, but most warehouses aim for FIFO (First-In, First-Out) for quality control and shelf-life issues. Inventory managers must coordinate with accounting to reconcile physical flows and accounting valuation when the costing method is LIFO.

Who should be cautious about using LIFO?

Several groups should avoid or carefully consider LIFO: companies that report under IFRS (already prohibited from using LIFO); businesses with perishable goods or strict product rotation requirements (where FIFO is operationally essential); and firms that rely on externally comparable financial metrics and want to avoid distortions caused by LIFO during inflation.

Practical examples

Example 1: A U.S.-based metals distributor experiencing rising commodity prices may prefer LIFO to reflect current replacement costs in COGS and lower taxable income this year. Example 2: A grocery chain handling perishable food simply cannot align store operations with LIFO without increasing spoilage and product quality issues, so it tends to avoid LIFO even if permitted by accounting rules.

Roles and responsibilities when adopting LIFO

Adoption typically involves executives (strategic decision), accounting/tax (analysis and compliance), IT (system configuration), auditors (validation), and operations (reconciling physical vs. accounting flows). Communication among these groups is essential to ensure accurate reporting, to manage LIFO reserve disclosures, and to plan for potential long-term implications such as reduced reported profits or effects on borrowing covenants.

Key takeaways

• LIFO is primarily used by companies and accountants operating in jurisdictions where it is allowed (notably the U.S.).
• Industries with non-perishable inventory and exposure to inflation are common LIFO users.
• Tax and accounting professionals, ERP/WMS teams, auditors, and supply chain managers all play roles in evaluating, implementing, and maintaining LIFO.
• Companies bound by IFRS, handling perishable goods, or needing straightforward comparability are less likely to be LIFO users.

Understanding who uses LIFO helps you identify whether it fits your business. If you are considering the method, involve accounting, tax, systems, and operations teams early so the decision balances financial strategy, regulatory constraints, and real-world inventory handling.