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 In...