Inventory

FIFO vs. Weighted Average: Choosing the Right Inventory Valuation

By CashSheet Team··7 min read
FIFO vs. Weighted Average: Choosing the Right Inventory Valuation

Why valuation method matters

Inventory valuation determines your Cost of Goods Sold (COGS) on the income statement and your inventory asset value on the balance sheet. Pick the wrong method and you'll either overstate profits (and overpay taxes) or understate them (and confuse investors).

FIFO: First In, First Out

FIFO assumes you sell the oldest inventory first. In a rising-price environment, this means your COGS reflects older, lower costs — resulting in higher reported profit. It's intuitive for perishable goods and matches physical flow in most warehouses.

Best for: restaurants, groceries, any business where stock actually rotates by age.

Weighted Average

Weighted average blends the cost of all units available for sale and assigns that average to each unit sold. It smooths out price fluctuations and is simpler to maintain when you have high-volume, interchangeable inventory.

Best for: bulk commodities, hardware supplies, businesses with frequent purchases at varying prices.

How CashSheet handles it

You set the valuation method per item category. CashSheet recalculates cost layers on every receipt and applies the correct COGS on every sale or production consumption. Changing methods mid-year is possible but requires a revaluation entry — the system guides you through it.

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