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.