Inventory Valuation (FIFO/LIFO/AVCO)

Q: What is the FIFO method of inventory valuation?

First-In-First-Out assumes the oldest stock is sold first, so closing inventory is valued at the most recent purchase costs.

Q: How do FIFO, LIFO and AVCO differ during rising prices?

In inflation FIFO gives the lowest cost of sales and highest profit; LIFO gives the highest cost of sales and lowest profit; AVCO (weighted average) sits in between.

Q: Work out closing inventory using AVCO.

Recalculate a weighted average cost per unit after each purchase and value issues/closing at that average.

Q: What does 'lower of cost and net realisable value' mean (IAS 2)?

Inventory is valued at the lower of what it cost and its net realisable value (expected selling price less costs to sell), so losses are recognised early.

Q: Is LIFO permitted under IFRS, and why?

No. IAS 2 prohibits LIFO because it can distort the balance sheet (old, unrealistic costs) and profit; only FIFO and weighted average are allowed.

5 question(s)

What is the FIFO method of inventory valuation?

Beginner

First-In-First-Out assumes the oldest stock is sold first, so closing inventory is valued at the most recent purchase costs.

Buy 10@2 then 10@3, sell 12 -> COGS = 10@2 + 2@3; closing 8@3

Real-world example Common for perishable goods where oldest stock genuinely sells first.

How do FIFO, LIFO and AVCO differ during rising prices?

Intermediate

In inflation FIFO gives the lowest cost of sales and highest profit; LIFO gives the highest cost of sales and lowest profit; AVCO (weighted average) sits in between.

Rising prices: FIFO -> higher profit; LIFO -> lower profit

Real-world example Method choice affects reported profit and tax, so it must be consistent.

Work out closing inventory using AVCO.

Intermediate

Recalculate a weighted average cost per unit after each purchase and value issues/closing at that average.

10@2 + 10@4 = 60 for 20 units -> avg 3/unit; 8 units left = 24

Real-world example Bulk commodities are often valued at weighted average cost.

What does 'lower of cost and net realisable value' mean (IAS 2)?

Intermediate

Inventory is valued at the lower of what it cost and its net realisable value (expected selling price less costs to sell), so losses are recognised early.

Cost 100, NRV 80 -> value at 80; write down 20

Real-world example Obsolete or damaged stock is written down to what it can actually fetch.

Is LIFO permitted under IFRS, and why?

Advanced

No. IAS 2 prohibits LIFO because it can distort the balance sheet (old, unrealistic costs) and profit; only FIFO and weighted average are allowed.

IFRS: FIFO or AVCO only (LIFO still allowed under US GAAP)

Real-world example A group reporting under IFRS cannot use LIFO even if a US subsidiary does locally.