Inventory Valuation: FIFO, LIFO and Weighted Average Cost

10/30/2026 •0•0

How to value inventory and cost of goods sold (COGS) using FIFO, LIFO and weighted average cost, with a worked inventory ledger and an explanation of what CPC 16 and the RIR permit in Brazil.

Written byLeon

Translated byEditorial

Revised byEditorial

Introduction

So far, we have measured inventory in units: how many to order, how many to keep as safety stock, and when to reorder. But inventory is also money. It appears as an asset on the balance sheet, and every unit sold becomes cost of goods sold (COGS) on the income statement. This lesson asks: what is each unit sold worth, and what is each unit left in inventory worth?

That sounds simple, but it isn't. The same product is often purchased several times at different prices. When a unit is sold, which batch does its cost come from: the older, cheaper one or the newer, more expensive one? The units may be physically identical, but the accounting choice affects profit, tax and the value of inventory on the balance sheet. The three classic methods for answering this question are:

FIFO: first in, first out;
LIFO: last in, first out;
Weighted-average cost: each unit is valued at the weighted-average cost of the units in inventory.

One point before we begin: the valuation method is a cost convention, not a rule for how goods must physically move. A supermarket should put the milk with the earliest expiration date on the shelves first. That is good stock-handling practice. But it may still value that inventory using average cost. The two are independent.

What goes into the cost of a unit

Before choosing a method, you need to know the cost of each incoming batch. Under CPC 16 (R1) – Inventories, the Brazilian accounting standard equivalent to the international standard IAS 2, the cost of acquisition includes the purchase price, import duties and other taxes (except those recoverable from the tax authorities), transportation, insurance, handling and other costs directly attributable to the acquisition, less trade discounts and rebates (paragraph 11).

In practice, freight and insurance paid by the buyer are included in the cost; trade discounts are deducted; and a tax the company can recover as a credit, such as ICMS for a company entitled to that credit, is also excluded. It is a receivable from the tax authorities, not a cost.

Here is a simplified example: a company buys 100 units for R$ 1.000,00. The invoice separately lists R$ 180,00 in ICMS that the company can claim as a credit, and the company pays R$ 50,00 in freight. The cost of the 100 units is 1.000 − 180 + 50 = R$ 870,00, or R$ 8,70 per unit.

The inventory record

The working tool is the inventory record, also called a Kardex card or stock card, which every ERP system generates automatically. Each row records a transaction. Its columns are grouped into receipts, issues and balance, with quantity, unit cost and total value in each group.

The equation tying it all together is:

COGS = beginning inventory + purchases − ending inventory

It holds under every method. The only thing that changes is how the same total is split between what was sold (COGS) and what remains (ending inventory).

We will use the same example for all three methods. A store records the following transactions for a product in March, while prices are rising:

Date	Transaction	Quantity	Unit cost
01/03	Beginning inventory	100	R$ 10,00
05/03	Purchase	200	R$ 12,00
10/03	Sale	150	—
18/03	Purchase	100	R$ 13,00
25/03	Sale	180	—

A total of 400 units were available during the month, at a cost of 1.000 + 2.400 + 1.300 = R$ 4.700,00. The store sold 330 units and had 70 left. Each unit sold for R$ 20,00, generating revenue of R$ 6.600,00.

FIFO: first in, first out

Under FIFO, units sold are assigned the costs of the oldest batches. As a result, ending inventory carries the costs of the most recently purchased units (CPC 16, paragraph 27).

Date	Transaction	Units sold: batches assigned	Cost of units sold	Balance (units)	Balance (R$)
01/03	Beginning inventory			100 at 10	1.000
05/03	Purchase of 200 at 12			100 at 10 + 200 at 12	3.400
10/03	Sale of 150	100 at 10 + 50 at 12	1.600	150 at 12	1.800
18/03	Purchase of 100 at 13			150 at 12 + 100 at 13	3.100
25/03	Sale of 180	150 at 12 + 30 at 13	2.190	70 at 13	910

COGS = 1.600 + 2.190 = R$ 3.790,00; ending inventory = R$ 910,00. Check: 3.790 + 910 = 4.700.

When prices are rising, FIFO assigns the older, cheaper costs to COGS and leaves the newer costs on the balance sheet. The result is lower COGS, higher profit and an ending inventory value that closely reflects current replacement cost.

LIFO: last in, first out

Under LIFO, units sold are assigned the costs of the most recent batches, leaving the oldest costs in ending inventory.

Date	Transaction	Units sold: batches assigned	Cost of units sold	Balance (units)	Balance (R$)
01/03	Beginning inventory			100 at 10	1.000
05/03	Purchase of 200 at 12			100 at 10 + 200 at 12	3.400
10/03	Sale of 150	150 at 12	1.800	100 at 10 + 50 at 12	1.600
18/03	Purchase of 100 at 13			100 at 10 + 50 at 12 + 100 at 13	2.900
25/03	Sale of 180	100 at 13 + 50 at 12 + 30 at 10	2.200	70 at 10	700

COGS = 1.800 + 2.200 = R$ 4.000,00; ending inventory = R$ 700,00. Check: 4.000 + 700 = 4.700.

When prices are rising, LIFO assigns the newer, more expensive costs to COGS. That means higher COGS and lower profit, while inventory on the balance sheet is valued at old prices that may be badly outdated if the product remains in stock for years.

When prices are rising, which valuation method produces the highest gross profit and an ending inventory value closest to current replacement cost?

Answer: FIFO — it assigns the older, cheaper costs to units sold first, reducing COGS and increasing profit, while leaving the most recent costs in inventory. LIFO does the opposite. COGS plus ending inventory is the same under all three methods, but the split changes, and so does profit.

Weighted-average cost

Under the average-cost method, each unit in inventory is valued at the weighted-average cost of all the units. There are two versions (CPC 16, paragraph 27: the average may be calculated periodically or as each batch is received):

Moving weighted average (or perpetual average): the average is recalculated after each receipt:

new average cost = (value of the inventory balance + value of the receipt) ÷ (units in the inventory balance + units received)

Units sold are assigned the average cost in effect at the time. Sales do not change that average.

Date	Transaction	Average cost	Cost of units sold	Balance (units)	Balance (R$)
01/03	Beginning inventory	10,00		100	1.000,00
05/03	Purchase of 200 at 12	3.400 ÷ 300 = 11,333...		300	3.400,00
10/03	Sale of 150	11,333...	1.700,00	150	1.700,00
18/03	Purchase of 100 at 13	3.000 ÷ 250 = 12,00		250	3.000,00
25/03	Sale of 180	12,00	2.160,00	70	840,00

COGS = 1.700 + 2.160 = R$ 3.860,00; ending inventory = R$ 840,00. A calculation tip: keep all decimal places in the average cost, or work from the value of the inventory balance, and round only at the end. Rounding 11,333... to 11,33 on every line creates small differences that add up.

Periodic weighted average: a single average is calculated at the end of the period using everything that was available: 4.700 ÷ 400 = R$ 11,75. So COGS = 330 × 11,75 = R$ 3.877,50 and ending inventory = 70 × 11,75 = R$ 822,50. It is simpler, but the cost of sales is not known until the period closes.

Comparing the methods

	FIFO	Moving average cost	LIFO
Revenue	6.600	6.600	6.600
COGS	3.790	3.860	4.000
Gross profit	2.810	2.740	2.600
Ending inventory	910	840	700
COGS + ending inventory	4.700	4.700	4.700

The same purchases and sales valued under three methods. When prices are rising, FIFO produces the highest profit and ending inventory value; LIFO produces the lowest; average cost falls between them.

Three takeaways:

When prices are rising, the order is always the same: FIFO has the lowest COGS and highest profit; LIFO has the highest COGS and lowest profit; average cost falls in between. When prices are falling, the order reverses.
The total does not change: the method only determines how much cost is recognized in the income statement now and how much remains on the balance sheet for the next period.
The method affects the metrics covered in the lesson on inventory policy: inventory turnover by value (COGS ÷ average inventory) and inventory coverage vary by method. When comparing two companies' turnover, check whether they value inventory the same way.

A company values its inventory using the moving weighted-average cost method. It has 200 units valued at R$ 2.000,00 and buys another 300 units at R$ 15,00 each. What is the new average cost?

Answer: R$ 13,00 — (2.000 + 300 × 15) ÷ (200 + 300) = 6.500 ÷ 500 = 13,00. The answer R$ 12,50 is the simple average of the two prices (10 and 15), which ignores the larger size of the new batch.

What about Brazil? LIFO is not permitted

This is the point that comes up most often in exams and in practice.

For financial reporting, CPC 16 (R1), paragraph 25, requires inventory costs to be assigned using either FIFO or weighted-average cost. An entity must use the same method for inventories with a similar nature and use. For items that are not interchangeable or that are produced for specific projects, such as a property or a custom-built machine, the specific identification of each item's cost is used (paragraphs 23 and 24). LIFO is not among the permitted methods. The same is true of the international standard IAS 2, which eliminated LIFO in its 2003 revision. In the United States, local rules (US GAAP) still permit LIFO, which is why it continues to appear in American textbooks.

Under income tax law, the Income Tax Regulations (Decree No. 9.580/2018), Article 307, state that goods held at the end of the tax period may be valued at average cost or at the cost of the most recently acquired or produced goods. Valuation at the selling price less the profit margin is also permitted (legal basis: Decree-Law No. 1.598/1977, Article 14). Leaving the most recently acquired goods in ending inventory is exactly what FIFO does. LIFO leaves the oldest goods in inventory, so it does not qualify and is not accepted by the tax authorities.

Why don't the tax authorities accept it? Look at the example: when prices are rising, LIFO reduces profit from R$ 2.810,00 to R$ 2.600,00. Lower profit means less IRPJ and CSLL tax. Under the actual-profit tax regime, where the combined rate can reach 34%, that would mean up to R$ 71,40 less tax in this tiny example. For a large company in a country with inflation, the difference is enormous. LIFO also leaves inventory on the balance sheet valued at much older prices, distorting the picture of the company's assets.

Two further requirements apply regardless of the method:

The lower of cost and net realizable value (CPC 16, paragraph 9). If goods become obsolete or damaged, or their selling price falls below cost, the inventory value must be reduced to the amount the company actually expects to receive: the estimated selling price less the costs of selling.
Consistency: once a method is chosen, it should be maintained. Switching methods every year to produce the most convenient profit figure would make the numbers incomparable.

So why study LIFO? For three reasons: it appears in competitive exams and other tests, it appears in foreign literature, and it can be used internally in management reports to show margins based on replacement cost. It cannot, however, be used in published financial statements or to calculate tax.

A Brazilian company taxed under the actual-profit regime wants to use LIFO to reduce its tax in a year of high inflation. Which statement is correct?

Answer key: No. CPC 16 permits only FIFO or weighted-average cost (as well as specific identification), and the Brazilian Income Tax Regulations do not allow LIFO. Article 307 of Decree 9.580/2018 permits average cost or the cost of the most recently acquired goods (the effect of FIFO). Consistency is required, but it does not make a method acceptable if the standard does not permit it.

References

COMITÊ DE PRONUNCIAMENTOS CONTÁBEIS. Pronunciamento Técnico CPC 16 (R1) – Estoques. Corresponding international standard: IAS 2.

BRASIL. Decree No. 9.580 of November 22, 2018 (Income Tax Regulations), art. 307.

GONÇALVES, Paulo. Administração de materiais. Elsevier Brasil, 2017.

Exercises

Easy

1) Using the lesson’s example, calculate cost of goods sold (COGS) and ending inventory under the periodic weighted-average method. Explain why the results differ from those under the moving-average method.

2) A company buys 500 units of a product for R$ 4.000,00 (the invoice amount, after the trade discount). The invoice lists R$ 480,00 in ICMS tax, which the company can claim as a credit, and the company pays R$ 200,00 in freight. What is the inventory cost per unit?

3) A company uses the moving weighted-average cost method. It has 80 units in inventory worth R$ 1.200,00 and buys another 120 units at R$ 17,50 each. What is the new average cost per unit?

4) A store began the year with R$ 12.000,00 in inventory, purchased R$ 45.000,00 in merchandise and ended the year with R$ 9.500,00 in inventory. What was its COGS for the year?

5) When prices are falling, which method produces the highest gross profit? Which of the methods accepted in Brazil produces the highest profit?

Hard

6) A distributor recorded the following transactions for one item during a month: day 01, beginning inventory of 50 units at R$ 8,00 each; day 03, purchase of 100 units at R$ 9,00 each; day 12, sale of 120 units; day 20, purchase of 80 units at R$ 10,00 each; day 28, sale of 60 units. Prepare an inventory record and calculate COGS and ending inventory under FIFO, LIFO and the moving weighted-average cost method.

7) Using the data from exercise 6 and assuming each unit sold for R$ 15,00, calculate gross profit under each method. Which methods can the company use for its balance sheet and tax calculations?

8) An electronics store records the following transactions for a product whose purchase price is falling: beginning inventory of 60 units at R$ 20,00 each; purchase of 100 units at R$ 18,00 each; sale of 120 units; purchase of 80 units at R$ 15,00 each; sale of 70 units. Each unit sold for R$ 25,00. Calculate COGS, ending inventory and gross profit under FIFO and the moving weighted-average cost method. Which produces the higher profit, and why?

9) In the lesson’s example, ending inventory under FIFO is 70 units at R$ 13,00 each (R$ 910,00). By the reporting date, the product had become outdated: the company expects to sell it for R$ 12,00 per unit and incur selling expenses of R$ 1,50 per unit. At what amount should the inventory appear on the balance sheet, and what loss should be recognized?

10) Using the data from exercises 6 and 7, calculate inventory turnover by value (COGS ÷ average inventory, where average inventory is the average of beginning and ending inventory) under FIFO and the moving-average method. What does the result tell you about comparing the inventory turnover of two companies (see the lesson on inventory policy and turnover)?

Answer Key

1) Periodic weighted-average cost = total cost of goods available ÷ units available = 4.700 ÷ 400 = R$ 11,75.
COGS = 330 × 11,75 = R$ 3.877,50; ending inventory = 70 × 11,75 = R$ 822,50.
This differs from the moving-average result (COGS of R$ 3.860,00) because the periodic method applies the cost of the day 18 purchase (R$ 13,00) to every sale, including those on day 10, before that purchase had occurred. The moving-average method uses only the costs known on each sale date.

2) Recoverable ICMS tax is excluded from cost, while freight is included: 4.000 − 480 + 200 = R$ 3.720,00. Per unit: 3.720 ÷ 500 = R$ 7,44.

3) (1.200 + 120 × 17,50) ÷ (80 + 120) = (1.200 + 2.100) ÷ 200 = 3.300 ÷ 200 = R$ 16,50.

4) COGS = beginning inventory + purchases − ending inventory = 12.000 + 45.000 − 9.500 = R$ 47.500,00.

5) When prices fall, the order reverses: LIFO assigns the most recent, now cheaper costs to COGS and produces the highest profit. Of the methods accepted in Brazil (FIFO and average cost), average cost produces the highest profit because FIFO assigns the older, more expensive costs to COGS.

6) Goods available: 50 + 100 + 80 = 230 units, costing 400 + 900 + 800 = R$ 2.100,00. Units sold: 120 + 60 = 180; units remaining: 50.
FIFO: day 12 sale = 50 × 8 + 70 × 9 = 400 + 630 = 1.030 (30 remain at 9); day 28 sale = 30 × 9 + 30 × 10 = 270 + 300 = 570. COGS = R$ 1.600,00; ending inventory = 50 × 10 = R$ 500,00.
LIFO: day 12 sale = 100 × 9 + 20 × 8 = 900 + 160 = 1.060 (30 remain at 8); day 28 sale = 60 × 10 = 600. COGS = R$ 1.660,00; ending inventory = 30 × 8 + 20 × 10 = R$ 440,00.
Moving weighted-average cost: after the day 03 purchase, average cost = (400 + 900) ÷ 150 = 1.300 ÷ 150 = 8,666...; day 12 sale = 120 × 8,666... = 1.040,00; remaining 30 units = 260,00. After the day 20 purchase, average cost = (260 + 800) ÷ 110 = 1.060 ÷ 110 = 9,6364; day 28 sale = 60 × 9,6364 = 578,18. COGS = R$ 1.618,18; ending inventory = 50 × 9,6364 = R$ 481,82.
Under every method, COGS + ending inventory = R$ 2.100,00.

7) Sales revenue = 180 × 15 = R$ 2.700,00. Gross profit = sales revenue − COGS:
FIFO: 2.700 − 1.600 = R$ 1.100,00;
average cost: 2.700 − 1.618,18 = R$ 1.081,82;
LIFO: 2.700 − 1.660 = R$ 1.040,00.
For its balance sheet and tax calculations, the company may use FIFO or average cost, but not LIFO (CPC 16 and art. 307 of the Income Tax Regulations).

8) Goods available: 60 × 20 + 100 × 18 + 80 × 15 = 1.200 + 1.800 + 1.200 = R$ 4.200,00 (240 units). Units sold: 190; units remaining: 50. Sales revenue = 190 × 25 = R$ 4.750,00.
FIFO: first sale = 60 × 20 + 60 × 18 = 1.200 + 1.080 = 2.280 (40 remain at 18); second sale = 40 × 18 + 30 × 15 = 720 + 450 = 1.170. COGS = R$ 3.450,00; ending inventory = 50 × 15 = R$ 750,00; gross profit = 4.750 − 3.450 = R$ 1.300,00.
Moving weighted-average cost: average cost after the first purchase = (1.200 + 1.800) ÷ 160 = 18,75; first sale = 120 × 18,75 = 2.250 (remaining 40 units = 750); average cost after the second purchase = (750 + 1.200) ÷ 120 = 16,25; second sale = 70 × 16,25 = 1.137,50. COGS = R$ 3.387,50; ending inventory = 50 × 16,25 = R$ 812,50; gross profit = 4.750 − 3.387,50 = R$ 1.362,50.
Average cost produces the higher profit: when prices fall, FIFO assigns the older, more expensive batches to COGS first. Check: 3.450 + 750 = 3.387,50 + 812,50 = 4.200.

9) Net realizable value per unit = 12,00 − 1,50 = R$ 10,50, below the cost of R$ 13,00. Inventory is measured at the lower of the two (CPC 16, item 9): 70 × 10,50 = R$ 735,00 on the balance sheet. Loss to recognize: 910 − 735 = R$ 175,00.

10) Beginning inventory: 50 × 8 = R$ 400,00 (the same under both methods).
FIFO: average inventory = (400 + 500) ÷ 2 = 450; turnover = 1.600 ÷ 450 = 3,56.
Average cost: average inventory = (400 + 481,82) ÷ 2 = 440,91; turnover = 1.618,18 ÷ 440,91 = 3,67.
The same store, with the same purchases and sales, reports different turnover figures solely because of its inventory valuation method. Before comparing two companies’ inventory turnover by value, check whether they value inventory the same way.

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