Inventory is often the biggest asset on a business's balance sheet. So how it's valued changes reported profit and taxes. The methods differ in how they assign cost to units sold and units still on hand.

Here's how each method treats the same purchase in a different way:

FIFO (First In, First Out)

FIFO assumes the oldest stock sells first. That leaves newer, often pricier items on the books. It's widely used, and it keeps book values close to current cost.

LIFO (Last In, First Out)

LIFO assumes the newest stock sells first. That leaves older, often cheaper items on the books. It's allowed in some places, and it can lower reported profit when costs go up.

Weighted Average Cost

This method blends the cost of all units into one average cost. That cost applies the same way to all units sold and all units left on hand. It's simpler to use for bulk stock that's all alike.

Specific Identification

Rather than guessing at the order of sale, specific identification tracks the exact cost of each unit. This works well for unique, high-value items — like vehicles or custom equipment — where each unit truly has its own cost. It's not a good fit for high-volume stock that's all alike.

Why the Choice Matters

The same stock can show different reported profit, tax bills, and book value, based on which method is used. So this isn't just a bookkeeping detail. It shapes how the business's numbers look on paper. Switching methods later often means telling people about the change, then sticking with it going forward.

Key Takeaways

FIFO, LIFO, weighted average cost, and specific identification each value stock in a different way, even from the same purchases. The right method depends on the kind of stock a business holds. It also depends on the accounting rules that apply, and how the business wants its numbers to reflect cost.

Learn more about InventorysHub.