A Practical Guide to Inventory Valuation Methods: FIFO, LIFO & Weighted Average

FIFO (First-In, First-Out) 

Assumes the oldest inventory is sold first. 

Example: If the latest chairs were purchased at $35 each, unsold inventory is valued at the newest costs. 

Impact: Higher reported inventory value on balance sheets, beneficial for securing loans or attracting investors. 

LIFO (Last-In, First-Out) 

Assumes the newest inventory is sold first. 

Example: Unsold chairs are valued at older purchase prices (e.g., $30 per unit from earlier batches). 

Impact: Lowers taxable income during inflation by increasing COGS, but may understate inventory value for financial reporting. 

Weighted Average Cost (WAC) 

Calculates an average cost per unit across all purchases. 

Example: Total inventory cost divided by total units yields an average price (e.g., $31.50 per chair). 

Impact: Smoothes out price fluctuations, offering a middle-ground valuation for stable financial statements. 

Strategic Insights 

Loans/Investors: FIFO boosts balance sheet value, making the business appear more asset-rich. 

Tax Savings: LIFO reduces taxable income in inflationary environments. 

Simplicity: WAC simplifies tracking for businesses with homogeneous products. 

 

For a deeper dive into calculations, real-world scenarios, and strategic tips, Read More at - https://procstat.com/knowledge-center/blog/a-practical-guide-to-inventory-valuation-methods-fifo-lifo-weighted-average/