Inventory Valuation Methods
When identical goods are bought at different prices, the business must decide which cost to assign to units sold and which to units remaining. The three classic cost-flow assumptions are:
- FIFO (First In, First Out): the oldest purchases are deemed sold first, so closing stock carries the latest prices.
- LIFO (Last In, First Out): the newest purchases are deemed sold first, leaving the oldest costs in stock.
- Weighted Average: a new average cost per unit is computed after every purchase (moving average) and used for subsequent issues.
Indian rules
AS-2, Ind AS 2 and ICDS-II permit only FIFO and Weighted Average. LIFO is not allowed for financial reporting or for computing taxable income in India. It is included here because students and analysts still compare it, and because in rising prices it shows the lowest profit — useful for understanding the impact of method choice.
How this tool works
Enter each purchase and sale with date, quantity and rate (for sales, the selling price is used only to compute gross profit). The tool sorts by date, runs all three methods and shows closing quantity, closing value, cost of goods sold, remaining cost layers and gross profit side by side, with a comparison chart. It warns if a sale exceeds the stock available.
Worked example
Purchases: 100 @ ₹50, 200 @ ₹55; sale 150; purchase 100 @ ₹60; sale 120; purchase 50 @ ₹62. Closing quantity is 180 under every method, but the value differs:
- FIFO: 30 @ 55 + 100 @ 60 + 50 @ 62 = ₹10,750; COGS ₹14,350.
- LIFO: 100 @ 50 + 30 @ 55 + 50 @ 62 = ₹9,750; COGS ₹15,350.
- Weighted average: approximately ₹10,500; COGS approximately ₹14,600.
Purchases of ₹25,100 always equal COGS + closing stock, whichever method is used.
Choosing a method
FIFO matches physical flow for perishable or dated goods and gives a balance sheet closer to current cost. Weighted average smooths price fluctuations and suits bulk commodities. Once chosen, apply the method consistently.
Frequently Asked Questions
Which method gives higher profit when prices rise?
FIFO, because older (cheaper) costs go to COGS and the latest (higher) costs stay in closing stock.
Is LIFO allowed in India?
No. AS-2/Ind AS 2 and ICDS-II allow FIFO and weighted average only. The tool shows LIFO for comparison.
Does the sale rate affect stock valuation?
No. Sale rate is used only to compute gross profit. Stock is valued at cost (or net realisable value if lower).
Can I enter multiple items?
This tool handles one item at a time. For item-wise quantities and values across many SKUs use the Stock Register tool.
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.