Can someone provide a clear comparison table of FIFO, LIFO, and weighted average cost flow assumptions?
I keep mixing up the effects of FIFO, LIFO, and weighted average on the financial statements, especially during periods of rising prices. I need a side-by-side comparison that shows how each method affects COGS, ending inventory, gross profit, and taxes. This is heavily tested on CFA Level I, right?
Absolutely — cost flow assumptions are a staple CFA Level I topic. Here is a comprehensive comparison using a single dataset so you can see the differences clearly.
Setup — Oakridge Hardware Distributors:
Oakridge sells industrial fasteners. During Q1 2026:
| Transaction | Units | Unit Cost |
|---|---|---|
| Beginning inventory | 200 | $10.00 |
| Purchase — Jan 15 | 300 | $11.00 |
| Purchase — Feb 20 | 250 | $12.50 |
| Purchase — Mar 10 | 150 | $13.00 |
| Available for sale | 900 | |
| Units sold | 600 |
Cost of Goods Available for Sale:
200 × $10 + 300 × $11 + 250 × $12.50 + 150 × $13 = $2,000 + $3,300 + $3,125 + $1,950 = $10,375
Method 1: FIFO (First-In, First-Out)
Sells oldest units first: 200 @ $10 + 300 @ $11 + 100 @ $12.50
COGS = $2,000 + $3,300 + $1,250 = $6,550
Ending inventory = $10,375 − $6,550 = $3,825 (150 @ $12.50 + 150 @ $13)
Method 2: LIFO (Last-In, First-Out)
Sells newest units first: 150 @ $13 + 250 @ $12.50 + 200 @ $11
COGS = $1,950 + $3,125 + $2,200 = $7,275
Ending inventory = $10,375 − $7,275 = $3,100 (200 @ $10 + 100 @ $11)
Method 3: Weighted Average
Weighted avg cost = $10,375 / 900 = $11.528/unit
COGS = 600 × $11.528 = $6,917
Ending inventory = 300 × $11.528 = $3,458
Summary Table — Rising Prices:
| Metric | FIFO | LIFO | Wtd Avg |
|---|---|---|---|
| COGS | Lowest | Highest | Middle |
| Ending Inventory | Highest | Lowest | Middle |
| Gross Profit | Highest | Lowest | Middle |
| Income Tax | Highest | Lowest | Middle |
| Cash Flow (after tax) | Lowest | Highest | Middle |
Critical Exam Points:
- All relationships reverse in a declining price environment.
- LIFO is prohibited under IFRS — only allowed under US GAAP.
- FIFO ending inventory is closest to current replacement cost.
- LIFO COGS is closest to current replacement cost.
Practice these comparisons with our CFA Level I question bank.
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