FIFO vs. weighted average cost: how do they affect COGS, inventory, and taxes when prices are rising?

Inventory cost flow assumptions determine how you allocate the cost of goods available for sale between COGS (income statement) and ending inventory (balance sheet). Here is the definitive comparison.

The Core Concept:

Cost of Goods Available for Sale = Beginning Inventory + Purchases

This total is split into:

• COGS (flows to income statement)
• Ending Inventory (stays on balance sheet)

The cost flow assumption determines which costs go where.

Worked Example: Sableridge Electronics

Sableridge sells circuit boards. Transactions for Q1:

Date	Units	Unit Cost	Total
Jan 1 (Beginning)	200	$40	$8,000
Jan 15 (Purchase)	300	$44	$13,200
Feb 20 (Purchase)	250	$48	$12,000
Total Available	750	—	$33,200
Units Sold	500	—	?
Ending Inventory	250	—	?

FIFO (First-In, First-Out): COGS uses oldest costs first:

• 200 units @ $40 =$8,000
• 300 units @ $44 =$13,200
• COGS = $21,200

Ending inventory uses newest costs:

• 250 units @ $48 = **$12,000**

Weighted Average Cost: Weighted avg cost = $33,200 / 750 = **$44.267/unit**

• COGS = 500 x $44.267 = **$22,133**
• Ending Inventory = 250 x $44.267 = **$11,067**

Summary (Rising Prices):

Metric	FIFO	Weighted Avg
COGS	$21,200 (lower)	$22,133 (higher)
Gross Profit	Higher	Lower
Ending Inventory	$12,000 (higher)	$11,067 (lower)
Income Tax	Higher (more profit)	Lower (less profit)
Cash Flow	Lower (more tax)	Higher (less tax)

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Key Points:

• Under IFRS, LIFO is prohibited. The exam focuses on FIFO vs. weighted average.
• FIFO ending inventory is closest to current replacement cost (uses newest prices).
• FIFO COGS is the most outdated (uses oldest prices).

Exam Tip: If prices are rising and the question asks which method results in higher net income, the answer is always FIFO. If it asks about better cash flow, the answer is weighted average (lower taxes).

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