A company may want to choose an inventory method that matches the actual physical flow of its inventory (e.g., a grocery store might want to follow FIFO).

However, a company is not required to choose an inventory method that approximates actual physical flow and few companies choose an inventory method on the basis of physical flow alone.

Taxes and income also affect the decision of which inventory method to use.

When prices are rising, a company may choose LIFO in order to reduce taxable income (i.e., lower their tax bill).

If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors. This is called the LIFO conformity rule.