Inventory Methods
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Companies are constantly buying new inventory while selling off old inventory, and there's more than one way to decide which cost gets expensed as cost of goods sold when a sale happens. Here are the four methods you need to know.
What is FIFO?
FIFO (first-in, first-out) expenses the oldest purchased items first — the first units bought are treated as the first units sold.
What is LIFO?
LIFO (last-in, first-out) is the opposite of FIFO: it expenses the newest items first, so the most recently purchased units are treated as the first ones sold.
What is the weighted-average method?
Under the weighted-average method, you find the average cost of inventory at the end of each period:
This method follows the periodic inventory system — the average is only calculated once, at period end.
What is the moving-average method?
The moving-average method follows the perpetual inventory system instead. The average cost is recalculated after each purchase, using the same formula (total cost ÷ total units on hand) — but not after a sale, since selling units removes them at the existing average cost without changing what that average is.
The real divide is periodic vs. perpetual, not just the math. Weighted-average recalculates once per period; moving-average recalculates continuously, every time new inventory comes in at a different cost.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.