FIFO vs LIFO vs Weighted Average: Inventory Costing With One Example
By SimplyCPA · 24 October 2026
On this page (7)
- FIFO: The oldest costs go to cost of goods sold first; ending inventory holds the newest costs.
- LIFO: The newest costs go to cost of goods sold first; allowed under US GAAP but not under IFRS or Ind AS.
- Weighted average: Every unit carries the average cost of all units available.
- Rising prices: LIFO gives the highest cost of goods sold, the lowest profit and the lowest ending inventory.
- Valuation: FIFO and average use lower of cost and net realisable value; LIFO and the retail method use lower of cost or market.
Why cost-flow assumptions exist
When identical units are bought at different prices, a company needs a rule for which cost goes to cost of goods sold (COGS) and which stays in ending inventory. The physical flow of goods doesn't have to match — this is purely a costing assumption.
One example, three methods (periodic system)
Beginning inventory: 100 units @ $10 = $1,000
Purchase 1: 200 units @ $12 = $2,400
Purchase 2: 100 units @ $15 = $1,500
Available for sale: 400 units, $4,900. Sold: 250 units. Ending inventory: 150 units.
| Method | COGS | Ending inventory |
|---|---|---|
| FIFO | 100 × $10 + 150 × $12 = $2,800 | 50 × $12 + 100 × $15 = $2,100 |
| LIFO | 100 × $15 + 150 × $12 = $3,300 | 50 × $12 + 100 × $10 = $1,600 |
| Weighted average ($4,900 ÷ 400 = $12.25) | 250 × $12.25 = $3,062.50 | 150 × $12.25 = $1,837.50 |
Check: in every row, COGS + ending inventory = $4,900. The methods only change where the cost lands.
What rising prices do
- LIFO matches the newest (highest) costs against revenue: highest COGS, lowest net income, lowest income tax — and the lowest, most out-of-date balance-sheet inventory.
- FIFO does the opposite: lowest COGS, highest income, and an inventory balance close to current cost.
- The LIFO reserve is the difference between inventory at FIFO and at LIFO — $2,100 − $1,600 = $500 here. Analysts add it back to compare LIFO and FIFO companies.
- The LIFO conformity rule: a company that uses LIFO for US income tax must also use it in its financial statements.
Valuing inventory at the year end
- FIFO and weighted average → lower of cost and net realisable value (NRV = estimated selling price less costs to complete and sell).
- LIFO and the retail inventory method → lower of cost or market, where market is replacement cost, capped at NRV (ceiling) and floored at NRV less a normal profit margin.
For candidates from India
LIFO is not permitted under Ind AS 2 or IFRS (IAS 2), so many Indian candidates have never applied it. On the CPA Exam it's fair game, along with LIFO layers and dollar-value LIFO. See our US GAAP vs Ind AS comparison for other differences.
Practice MCQs
1. In a period of rising prices, which method reports the highest gross profit?
(A) LIFO (B) FIFO (C) Weighted average (D) All are the same
Answer: B. FIFO charges the oldest, cheapest costs to COGS.
2. A company's inventory is $80,000 under FIFO and $62,000 under LIFO. What is its LIFO reserve?
(A) $62,000 (B) $80,000 (C) $18,000 (D) $142,000
Answer: C. FIFO inventory less LIFO inventory.
Full coverage, including dollar-value LIFO and inventory errors, is in our FAR inventory notes.