Compare FIFO, LIFO, and weighted-average inventory costing

Direct answer

FIFO assigns the oldest recorded costs to COGS first; LIFO assigns the newest; weighted-average costing uses an average unit cost. Compare COGS and ending inventory using the same quantities and purchase costs. Under IFRS, use FIFO or weighted average for interchangeable items and specific identification for items that are not interchangeable. LIFO is not permitted.

Why this question comes up

The cost-flow method can change reported COGS and profit without changing what was bought or sold. A side-by-side calculation shows the difference.

Records to gather

• Purchase history with dates, quantities, and unit costs
• Opening inventory quantities and costs, plus units sold and ending counts
• Current method in use and when it was adopted
• The financial-reporting framework and any separate tax inventory method

Review workflow

1. Check the rules. US GAAP allows FIFO, LIFO, and average cost. IFRS allows FIFO or weighted average for ordinarily interchangeable items, but requires specific identification for items that are not ordinarily interchangeable. LIFO is not an IFRS option.
2. Calculate each permitted method. Apply it to opening inventory, purchases, and units sold. Reconcile ending quantities to the count and show both COGS and ending inventory.
3. Explain the difference. When purchase costs rise, FIFO generally produces lower COGS and higher ending inventory than LIFO; falling costs reverse that pattern. Average cost falls between them in a simple rising-cost example.
4. Check the current method before changing it. Financial-reporting and tax rules are separate. In the US, changing the tax inventory method generally requires Form 3115; adopting LIFO has its own filing rules. Have an accountant review the proposed change.

What a useful answer should include

• The reporting framework and current method
• Purchase-cost layers or average-cost calculation, with any missing records
• COGS, ending inventory, and gross-profit difference under each permitted method
• Whether a proposed method change needs accounting or tax review

Common failure modes

• Comparing methods with incomplete costs. Missing opening layers or purchase prices make the COGS comparison unreliable.
• Treating a cost-flow assumption as warehouse practice. FIFO accounting does not prove older stock was physically sold first.
• Ignoring a method change. It can make period-to-period margin comparisons misleading and may require tax filings or financial-statement disclosure.