Financial Management and Business Data Analytics · Inventory Management

FIFO, LIFO, Weighted Average and Inventory Turnover Ratio

Updated 10 October 2026 · Fact-checked

Inventory valuation decides the rupee cost assigned to materials issued and to closing stock, using FIFO, LIFO or weighted average. Inventory turnover (cost of goods sold ÷ average inventory) shows how many times stock is used in a year. Holding period (days in year ÷ turnover) shows how long stock sits.

Understand Inventory Valuation and Stock Turnover Ratios

Every time a firm buys the same item at different prices, it faces a question: when stock is issued, which price do we charge? The answer changes the cost of goods sold, the profit and the value of closing stock. The total cost of opening stock plus purchases is fixed. It is only split differently between issues and closing stock.

FIFO (first in, first out) assumes the oldest lots are issued first. Closing stock is therefore valued at the latest prices. LIFO (last in, first out) assumes the latest lots are issued first. Closing stock is then valued at the oldest prices. LIFO is not an accepted method for financial reporting under AS 2 or Ind AS 2, but it is still asked in pricing-of-issues problems. Weighted average charges every issue at the average cost of stock on hand, which smooths out price swings.

When prices rise, FIFO gives a lower cost of issues and higher closing stock and profit. LIFO gives the opposite. When prices fall, the effects reverse. Weighted average falls between the two. The questions usually ask you to compare methods, so know this direction.

Valuation tells you what stock costs. Inventory turnover tells you how efficiently it is used. A high turnover means stock moves fast and less money is locked up. A very high figure may also signal stock-outs. A low figure may signal slow-moving or obsolete stock. The inventory holding period converts the same idea into days.

Key rules to remember

Cost of issue (FIFO): Issue cost = units from oldest lot × its price + units from next lot × its price ...; Exhaust the oldest lot before moving to the next. Closing stock comes from the latest lots.
Cost of issue (LIFO): Issue cost = units from latest lot × its price + units from the previous lot × its price ...; In a perpetual (issue-by-issue) record, use the latest lot available on the date of that issue.
Weighted average rate (perpetual): Rate = Total value of stock on hand ÷ Total units on hand; Recalculate after every purchase. Issues do not change the rate.
Stock check: Opening stock + Purchases = Cost of issues + Closing stock; Use this to verify every method. The total must be the same.
Average inventory: (Opening inventory + Closing inventory) ÷ 2; Use the figures given. If only closing stock is given, use it and say so.
Inventory turnover ratio: Cost of goods sold ÷ Average inventory; Answer in times. Some questions use sales in the numerator. Follow the question.
Inventory holding period: Days in year ÷ Inventory turnover ratio = Average inventory ÷ COGS × days in year; Use 365 or 360 as the question states. If not stated, say which you assume.

How to solve Inventory Valuation and Stock Turnover Ratios questions

Use this order for any question on pricing of issues or turnover.

1Read what is asked: valuation by one method, comparison of methods, or a ratio. Note whether the question wants a stores ledger, cost of issues or closing stock.
2Write all receipts and issues in date order with units, rate and value. Do not combine lots at this stage.
3For FIFO or LIFO, keep a running balance by lot. Take each issue from the correct end of the stock, and write the unit split clearly.
4For weighted average, recompute the rate after each purchase as total value ÷ total units. Charge the issues at that rate.
5Find closing stock units as opening plus receipts minus issues. Value them by the method used.
6Verify with opening stock + purchases = issues + closing stock. Fix any difference before going on.
7For ratios, find average inventory, then turnover, then holding period. State the days basis and the unit (times or days).
8Add one line of interpretation, such as the effect on profit or what the turnover suggests.

Quickest way: Lot-by-lot ledger with a total check

When to use it: When a question has two or three issues and you must finish in about ten minutes.

Draw three columns: receipts, issues, balance. Show the balance as units × rate for each lot.
Write the unit split of every issue before multiplying, for example 100 + 50.
For closing stock, value only the units left in the balance column.
Compute closing stock as total cost minus total issues and compare it with your balance. If they match, you are done.
For ratios, compute average inventory first, then divide once. Keep the formula in your answer for step marks.

Common mistakes in Inventory Valuation and Stock Turnover Ratios

Valuing closing stock at the wrong end of the stock under FIFO or LIFO
Students mix up which lot is issued first and which remains.
Fix: FIFO leaves the latest lots in stock. LIFO leaves the oldest lots in stock. Say this in one line before you start.
Using a simple average of rates under weighted average
Adding rates and dividing by the number of lots feels quicker.
Fix: Always use total value ÷ total units. The simple average ignores lot sizes.
Recalculating the weighted average rate after an issue
Students think every transaction changes the rate.
Fix: Only a purchase changes the rate. An issue removes stock at the existing rate.
Not checking that opening stock plus purchases equals issues plus closing stock
Students stop once the issue columns are filled.
Fix: Do the total check every time. An error in one lot shows up immediately.
Using closing inventory instead of average inventory in the turnover ratio
The closing figure is easiest to find in the balance sheet.
Fix: Use (opening + closing) ÷ 2 whenever both are given, and write the formula.
Writing the holding period without the days basis or confusing it with turnover
Students remember the ratio but not the conversion.
Fix: Holding period = days ÷ turnover. State 365 or 360, and label the answer in days.

Worked examples

Example 1

A firm records the following for a material. Opening stock: 100 units at ₹50. Purchase: 200 units at ₹56. Issue: 150 units. Purchase: 100 units at ₹60. Issue: 180 units. Find the cost of issues and closing stock under (a) FIFO, (b) LIFO and (c) weighted average (perpetual).

Show the solution

Total cost available = 100 × 50 + 200 × 56 + 100 × 60 = 5,000 + 11,200 + 6,000 = ₹22,200. Closing units = 100 + 200 + 100 − 150 − 180 = 70.
FIFO, first issue (150): 100 × 50 = 5,000 and 50 × 56 = 2,800, so ₹7,800. Balance: 150 units at ₹56.
FIFO, second issue (180): 150 × 56 = 8,400 and 30 × 60 = 1,800, so ₹10,200. Total issues = 7,800 + 10,200 = ₹18,000. Closing = 70 × 60 = ₹4,200. Check: 18,000 + 4,200 = 22,200.
LIFO, first issue (150): all from the ₹56 lot, 150 × 56 = ₹8,400. Balance: 100 at ₹50 and 50 at ₹56.
LIFO, second issue (180): 100 × 60 = 6,000, 50 × 56 = 2,800 and 30 × 50 = 1,500, so ₹10,300. Total issues = 8,400 + 10,300 = ₹18,700. Closing = 70 × 50 = ₹3,500. Check: 18,700 + 3,500 = 22,200.
Weighted average: after the first purchase, stock = 300 units, value ₹16,200, rate ₹54. First issue = 150 × 54 = ₹8,100. Balance = 150 units, ₹8,100.
After the second purchase: 250 units, value 8,100 + 6,000 = ₹14,100, rate ₹56.40. Second issue = 180 × 56.40 = ₹10,152. Closing = 70 × 56.40 = ₹3,948.
Total issues = 8,100 + 10,152 = ₹18,252. Check: 18,252 + 3,948 = 22,200.

Answer: FIFO: issues ₹18,000, closing stock ₹4,200. LIFO: issues ₹18,700, closing stock ₹3,500. Weighted average: issues ₹18,252, closing stock ₹3,948. Prices rose, so FIFO gives the highest closing stock and profit, and LIFO the lowest.

Example 2

A company reports cost of goods sold of ₹24,00,000 and sales of ₹30,00,000. Inventory was ₹3,50,000 at the start of the year and ₹4,50,000 at the end. Calculate the inventory turnover ratio (on cost of goods sold), the inventory holding period (365 days) and the turnover ratio on sales.

Show the solution

Average inventory = (3,50,000 + 4,50,000) ÷ 2 = ₹4,00,000.
Inventory turnover = 24,00,000 ÷ 4,00,000 = 6 times.
Holding period = 365 ÷ 6 = 60.83 days, about 61 days.
Turnover on sales = 30,00,000 ÷ 4,00,000 = 7.5 times.
Interpretation: stock is used and replaced six times a year, so it stays about two months before it is issued or sold. The sales-based figure is higher because sales include profit margin and is not comparable with cost-based figures.

Answer: Inventory turnover = 6 times. Holding period = about 60.83 days (≈ 61 days). Sales-based turnover = 7.5 times.

Exam tips

In the MCQ section, a valuation question is usually a short ledger. Use the total check to confirm your option before marking it, as there is no negative marking.
In written answers, show the unit split of each issue, such as 100 + 50. Examiners award step marks for it even if the final figure slips.
Name the method and state the price trend in a one-line comment. This earns interpretation marks in comparison questions.
For ratios, write the formula first, then substitute. State whether you used 365 or 360 days.
If a question gives only closing inventory, say so, use it as the denominator and carry on. Do not leave the question unsolved.

Practice questions from Inventory Management

Inventory Valuation and Stock Turnover Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inventory Valuation and Stock Turnover Ratios: frequently asked questions

Which inventory valuation method gives the highest profit when prices are rising?

FIFO gives the highest profit when prices rise, because older, cheaper costs go to cost of goods sold. LIFO gives the lowest profit and weighted average falls in between.

How do I calculate the inventory holding period?

Divide the number of days in the year by the inventory turnover ratio. Equivalently, divide average inventory by cost of goods sold and multiply by the days. Use 365 or 360 as the question states.

Should inventory turnover use sales or cost of goods sold?

Cost of goods sold is the better measure because inventory is carried at cost. Use sales only if the question says so. Always state which one you used.

Is LIFO allowed for financial reporting?

No. AS 2 and Ind AS 2 do not accept LIFO for measuring inventory. It is still studied in pricing-of-issues problems and for comparing the effect of cost-flow assumptions.