Exploration · Ch 5 · Accounting for Inventories
FIFO, LIFO, or Weighted Average?
You run a small coffee roaster that sells 1-lb bags of house blend. You bought 120 bags from your supplier across the year — wholesale prices moved with the commodity market — then sold some at the retail counter. The cost-flow method you pick changes what you report as cost of goods sold, ending inventory, and profit for the exact same physical transactions.
Scenario
Purchases
| Month | Units | Price/unit | Total |
|---|---|---|---|
| Jan | 40 | $10.00 | $400 |
| Apr | 30 | $12.00 | $360 |
| Jul | 30 | $14.00 | $420 |
| Oct | 20 | $16.00 | $320 |
| Total | 120 | avg $12.50 | $1500 |
Units sold70 of 120
Sale price per unit$25
Reported by method
COGS
Ending inventory
Gross profit
Tax @ 21%
Net income
FIFO
$760
$740
$990
$208
$782
LIFO
$980
$520
$770
$162
$608
Weighted Avg
$875
$625
$875
$184
$691
Under rising prices
LIFO reports 22% less profit than FIFO — and pays $46 less tax.
Same bags, same sale price, same physical transactions. LIFO expenses the newest (highest) costs first, so COGS is higher and reported profit is lower. That’s why some US firms pick LIFO — real tax savings while prices are rising. IFRS bans it precisely because of that.
Corporate tax pinned at 21% (US federal rate). Sales revenue = units sold × sale price. Ending inventory = total purchases − COGS. Real inventory decisions also consider IFRS prohibitions on LIFO, LIFO reserves, and conformity rules.