Meaning and permitted methods
Inventory valuation methods determine which part of accumulated cost is recognized as an expense when goods are sold and which part remains in the balance sheet. For non-interchangeable items, specific identification is used. For interchangeable inventories, IFRS provides for FIFO or weighted-average cost. FIFO assumes that the cost of the earliest receipts is issued first, but it does not necessarily describe the physical movement of the goods.
If a store buys identical products first at a lower price and then at a higher price, selling part of the batch produces different costs under FIFO and averaging. Period profit and the valuation of remaining inventory may therefore differ even though the actual purchases and payments are the same.
How to avoid a mistake
Do not confuse a valuation method with the decision about which box to remove from the shelf first. When comparing companies, check the accounting policy and whether it has been applied consistently. LIFO must not be presented as an IFRS-permitted option: it is not included among the permitted cost formulas in IAS 2. Other accounting systems must be studied separately. Related reading: [inventory and depreciation](/guides/inventory-and-depreciation/), [financial statement adjustments](/guides/financial-statement-adjustments/) and [inventory](/glossary/zapasy/).