Guide

9 min read

FIFO and LIFO: Which Inventory Valuation Method Is Right for You?

Why Does Inventory Valuation Matter?

Inventory valuation determines how your business calculates the cost of goods sold (COGS). This directly affects reported profit, taxes, and the inventory value on your balance sheet. If you choose the wrong method -- or don't understand the differences -- your income statement may paint a misleading picture of your profitability.

The three most common methods are FIFO (First In, First Out), LIFO (Last In, First Out), and weighted average cost. We'll use the same example for all three so the differences become crystal clear.

Our example: You first buy 100 units at EUR 10 each, then 100 units at EUR 12 each. You sell 150 units. What is the cost of goods sold?

FIFO -- First In, First Out

Under FIFO, the oldest stock is assumed to be sold first. This matches the actual physical inventory turnover in most cases -- especially for perishable and date-sensitive products.

FIFO Calculation Example

You sell 150 units: first 100 units from the first batch (at EUR 10) then 50 units from the second batch (at EUR 12). COGS = (100 x EUR 10) + (50 x EUR 12) = EUR 1,000 + EUR 600 = EUR 1,600. Remaining inventory: 50 units worth 50 x EUR 12 = EUR 600.

Matches physical flow -- oldest items leave first
In rising prices, COGS is lower and reported profit is higher
Recommended by IFRS and compliant with Finnish accounting law (KPL)
Downside: higher taxable income during inflation

LIFO -- Last In, First Out

Under LIFO, the most recently purchased stock is assumed to be sold first. This rarely matches physical flow, but in some markets it is used for tax purposes.

LIFO Calculation Example

You sell 150 units: first 100 units from the second batch (at EUR 12) then 50 units from the first batch (at EUR 10). COGS = (100 x EUR 12) + (50 x EUR 10) = EUR 1,200 + EUR 500 = EUR 1,700. Remaining inventory: 50 units worth 50 x EUR 10 = EUR 500.

During inflation, COGS is higher and taxable income is lower
Better matches current replacement costs on the income statement
Inventory book value is often understated
Does not match actual physical inventory flow

LIFO is NOT allowed under IFRS or Finnish accounting law (KPL). If your business operates in Finland, you cannot use LIFO for official bookkeeping. This is a key difference compared to US GAAP, where LIFO is permitted.

Weighted Average Cost

The weighted average cost method calculates the average unit cost of all items in stock. Every time goods are sold, COGS is based on this average price.

Weighted Average Calculation Example

Total cost = (100 x EUR 10) + (100 x EUR 12) = EUR 2,200. Total units = 200. Average cost = EUR 2,200 / 200 = EUR 11 per unit. You sell 150 units: COGS = 150 x EUR 11 = EUR 1,650. Remaining inventory: 50 units worth 50 x EUR 11 = EUR 550.

Smooths out price fluctuations -- no overreaction to individual price spikes
Simple to calculate and maintain
Allowed under both IFRS and Finnish KPL
Downside: does not provide exact cost per individual batch

Comparison Table: FIFO vs LIFO vs Weighted Average

Criteria	FIFO	LIFO	Weighted Average
Sale order	Oldest first	Newest first	Average
COGS in our example	EUR 1,600	EUR 1,700	EUR 1,650
Ending inventory value	EUR 600	EUR 500	EUR 550
Profit during inflation	Higher	Lower	In between
Taxable income during inflation	Higher	Lower	In between
IFRS compliant	Yes	No	Yes
Allowed in Finland (KPL)	Yes	No	Yes
Calculation complexity	Medium -- batch-level tracking	Medium -- batch-level tracking	Simple -- single average price

The Finnish Perspective: KPL and IFRS

In Finland, inventory valuation is regulated by the Accounting Act (KPL) and guidelines issued by the Accounting Board (KILA). IFRS standards apply to listed companies, but many KPL rules follow the same line. The most common valuation method in Finnish businesses is FIFO.

LIFO is prohibited in Finland -- under both IFRS (IAS 2) and KPL. This means the practical choice is between FIFO and weighted average cost. FIFO is the most common because it best matches physical inventory flow and is recommended by auditors.

Rule of thumb for Finnish businesses: use FIFO. It complies with accounting law, is recommended by auditors, and matches the actual inventory flow of most businesses. Weighted average is a good alternative if you purchase frequently at varying prices and batch-level tracking is cumbersome.

Which Method Is Right for You?

Choose FIFO if...

You sell physical products where the oldest batch should be sold first (food, cosmetics, electronics). You need an IFRS- and KPL-compliant method. You want accurate batch-level cost tracking.

Choose Weighted Average if...

You purchase frequently at different prices (e.g., raw materials). Batch-level tracking is cumbersome or unnecessary. You want simple, smooth cost calculations without batch-level bookkeeping.

How Inventa Handles Inventory Valuation

Inventa automatically tracks the purchase price of every received batch and calculates FIFO-based COGS in real time. You don't need to maintain separate spreadsheets or calculate costs manually.

Automatic FIFO Tracking

Every receipt creates its own batch. When selling, the system consumes the oldest batch first -- automatically.

Real-Time Cost Reports

See your inventory value, margins, and COGS in real time. No end-of-month surprises.

Procountor-Compatible Reports

Export your valuation report directly to Procountor. FIFO values transfer to your accounting with no extra work.

Summary

Your inventory valuation method directly affects your income statement, taxes, and balance sheet. In Finland, LIFO is not an option -- the choice is between FIFO and weighted average. For most businesses, FIFO is the best choice: it matches physical flow, is legally compliant, and produces a realistic picture of your inventory value. Weighted average suits businesses with many small purchases at varying prices. Whichever you choose, automated tracking -- for example through a Procountor integration -- eliminates manual work and the risk of errors.

Want to see how Inventa calculates FIFO valuation automatically?

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