When prices change, the method used to value inventory changes reported profit. The two common methods are FIFO (First-In, First-Out) and Weighted Average Cost.
This guide compares them with an example.
What is inventory valuation?
FIFO assumes the oldest stock is sold first, so closing inventory reflects the most recent (often higher) costs. Weighted average smooths cost by averaging all units available.
Indian accounting standards permit FIFO and weighted average; LIFO is not permitted.
FIFO vs weighted average
| Aspect | FIFO | Weighted average |
|---|---|---|
| Assumption | Oldest sold first | Average of all units |
| In rising prices | Higher profit, higher closing stock | Smoothed profit |
| Allowed in India | Yes | Yes |
Frequently asked questions
Is LIFO allowed in India?
No. Indian accounting standards do not permit the LIFO method.
Which method gives higher profit when prices rise?
FIFO, because older, cheaper costs are matched against current sales.