Inventory Valuation Methods: FIFO, LIFO & WAC

This guide breaks down the four main inventory valuation methods, shows the same data valued four ways, and helps you pick the one that fits your business.

What Is Inventory Valuation?

Inventory valuation is how you assign a monetary cost to the stock you hold and to the goods you sell. Because purchase prices change over time, the method you use decides which costs land in cost of goods sold (COGS) and which stay in ending inventory. It’s one of the most consequential accounting choices a product business makes.

Why Valuation Affects Profit and Taxes

Your gross profit is revenue minus COGS. Since inventory valuation methods split costs between COGS and inventory differently, they produce different profit figures from the exact same sales, and therefore different taxable income. In periods of rising prices, this difference can be significant, which is why the choice isn’t just an accounting technicality.

Cost of Goods Available for Sale

Every method starts from the same pool: beginning inventory + purchases = cost of goods available for sale. Valuation is simply the rule for dividing that pool between what you sold (COGS) and what remains (ending inventory).

Know what your inventory is really worth. GOIS tracks stock value and COGS in real time, so your margins are never a guess. Request a demo

The 4 Main Inventory Valuation Methods

• FIFO (First In, First Out): Assumes the oldest stock sells first. In rising prices, this gives lower COGS, higher profit, and inventory valued near current cost.
• LIFO (Last In, First Out): Assumes the newest stock sells first. In rising prices, this gives higher COGS, lower profit, and lower taxes. Allowed under US GAAP but banned under IFRS.
• Weighted Average Cost (WAC): Blends all costs into one average unit cost, smoothing price swings.
• Specific Identification: Tracks the actual cost of each individual item—ideal for high-value, serialized goods like jewelry or vehicles.

Worked Example: Same Data, Different Results

You buy 100 units at $10, then 100 units at $14, and sell 120 units.

• FIFO: COGS = (100 × $10) + (20 × $14) = $1,280; ending inventory = 80 × $14 = $1,120
• LIFO: COGS = (100 × $14) + (20 × $10) = $1,600; ending inventory = 80 × $10 = $800
• WAC: average cost = $2,400 ÷ 200 = $12; COGS = 120 × $12 = $1,440

Same sales, three different COGS figures—and three different profit numbers.

Periodic vs. Perpetual Valuation

Periodic valuation updates costs at the end of an accounting period; perpetual recalculates after every transaction. Perpetual is the modern standard because it keeps your inventory value—and your margins—accurate in real time rather than once a quarter.

GAAP vs. IFRS and the LIFO Ban

US GAAP permits FIFO, LIFO, and WAC. IFRS permits FIFO and WAC but prohibits LIFO. If you report internationally, LIFO is off the table—one reason many businesses default to FIFO or weighted average.

How to Choose the Right Method

• FIFO suits most retailers and anyone with perishable or fast-moving stock (it mirrors real flow).
• LIFO can reduce taxes in inflationary periods—but only if you’re US-only and can handle the complexity.
• WAC is simplest when items are interchangeable and hard to track individually.
• Specific identification fits low-volume, high-value, serialized inventory.

Whichever you choose, apply it consistently—switching inventory valuation methods midstream distorts your financials.

How Inventory Software Automates Valuation

Valuing inventory by hand across hundreds of SKUs and constant price changes is error-prone. A cloud inventory management system applies your chosen method automatically on a perpetual basis and surfaces the numbers through reporting and analytics—so your COGS, margins, and stock value are always current. GOIS does this for 2,400+ businesses across 20+ countries.

Key Takeaways

• Inventory valuation methods change COGS, profit, and taxes—same stock, different numbers.
• FIFO, LIFO, WAC, and specific identification each suit different businesses.
• LIFO is US-only (banned under IFRS); FIFO and WAC are the global defaults.
• Perpetual, software-driven valuation keeps your margins accurate in real time.

Frequently Asked Questions

Conclusion

Inventory valuation isn’t just bookkeeping—it shapes the profit you report and the tax you pay. Understand how FIFO, LIFO, weighted average, and specific identification treat cost, pick the method that fits your products and reporting rules, and apply it consistently. Then let the software handle the perpetual math, so your numbers stay right.