First of all FIFO and LIFO is an accounting concept. It relates to the method of valuation of stock at the end of a period. FIFO means first in first out that means say in a store if the store manager buys say maintenance material for stores use the maintenance materials used used comes from the first purchase then the second an so on. That is the stock of maintenance material at the end period say at the end of month is valued at the price of the latest purchased stocks. This is necessary because the price of stationary varies and one must decide at what price one is going to value the stock. The LIFO method is opposite to the FIFO method. LIFO means last in first out. That is in the above example the stores manager will value the maintenance material used in an order of prices from the last price first, the price before the last is second and so on. That is the value of stock is measured a the price of first purchase, second purchase and third purchase and so on. The following numerical example will show the difference between FIFO and LIFO.

Say The Manager bought 20 items at a price 5 dollars per item on May 1st and the Manager bought on May 5th 25 items at a price of 6 dollars and used 30 items on May 15th.

To calculate the quantity used using FIFO the 20 items will be used first at a price of 5 dollars and the reminder of 10 items from the purchase on may 5th at a price of 6. That is 20*5+10*6=160 which will be the value of material used using the FIFO method. The Inventory value will be Calculated Purchases minus the material used that is 20*5+25*6-160=90 or (25-10)*6=90. You can see the inventory is valued at the latest price that is at the price of material purchased on May 5th not at the price of material on May 1st.

To calculate the quantity used using LIFO method 25 items will be coming from the purchase on May 5th and 5 coming from the purchase on May 1st. That is the material used is ( 25*6+ 5*5)=175. The value of Inventory will be (20*5+25*6)-175=75 which is purchases minus the value of material used or it can be calculated from the purchase of material on May 1st minus the remaining value used after the material used from the purchase on May 5th. That is (20-5)*5=75. One can see the inventory value is calculates at the price of the material purchased begging of the month compared to FIFO where the value of inventory will be at prices at the end of the month.

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