How does switching from FIFO to LIFO affect Cost of Goods Sold (COGS) in an inflationary environment?

Switching from FIFO (First In, First Out) to LIFO (Last In, First Out) in an inflationary environment results in an increase in Cost of Goods Sold (COGS). This is due to the fact that under LIFO, the most recently purchased (and typically higher-cost) inventory is sold first. As prices increase over time, the newer inventory, which has a higher cost associated with it, will be matched against revenue, leading to a higher COGS.

This mechanism reflects the true cost of replacing inventory in a timely manner during inflationary periods, which can also provide tax benefits since a higher COGS reduces taxable income. In contrast, FIFO would report lower COGS during inflation because it matches older, lower-cost inventory against revenue, leaving more recent inventory (which is more expensive) on the balance sheet.