Inventory valuation methods are the rules that turn unsold stock into a money figure: FIFO, weighted average cost and specific identification. Under IFRS, the accounting standards used across most of Africa, these three are the only ones allowed, and LIFO is banned. The method you choose moves your profit, your tax and the stock value on your balance sheet.
The choice matters most when prices move between deliveries, as they do when the shilling, naira or cedi weakens. The same bag of sugar can carry three different costs in one quarter.
This guide runs one example through every method and sets out the rules that apply in Africa. It ends with the ArmPOS reports that do the work.
What inventory valuation means
Inventory valuation is the quantity on hand multiplied by a cost per unit, then checked against what the goods will sell for. The method decides which cost per unit you use when you bought the same item at different prices.
That one figure feeds two statements. Closing stock sits on the balance sheet as a current asset, and everything sold becomes cost of goods sold on the profit and loss. A higher closing value means a lower cost of sales and a higher profit in the same period.
Valuation is the money side of inventory management for a small business. It also drives the inventory turnover ratio, so a wrong stock value gives a wrong turnover.
The three methods IFRS allows, and the one it bans
IAS 2 allows FIFO or weighted average for goods that are interchangeable, and requires specific identification for goods that are not. The IFRS Foundation's summary of IAS 2 lists exactly these cost formulas. Small companies that report under IFRS for SMEs follow the same rule in Section 13.
| Method | How it assigns cost | Suits | Under IFRS |
|---|---|---|---|
| FIFO (first in, first out) | The oldest cost goes to the sale first. Closing stock carries the newest costs. | Food, medicine, cosmetics, fashion: anything that expires or dates | Allowed |
| Weighted average cost | Every unit carries the average cost of the units available, worked out per period or after each delivery. | Identical goods bought often at moving prices: sugar, cement, rice, cooking oil | Allowed |
| Specific identification | Each item keeps its own purchase cost. | One-off items: used cars, plots of land, made-to-order furniture | Required for items that are not interchangeable |
| LIFO (last in, first out) | The newest cost goes to the sale first. Closing stock carries the oldest costs. | Nothing reported under IFRS | Not allowed |
IFRS does not allow LIFO. The IASB removed it from IAS 2 in its 2003 revision. Deloitte's IFRS and US GAAP comparison says it plainly: "Last-in, first-out (LIFO) is not permitted."
IFRS for SMEs says the same in paragraph 13.18. LIFO survives mainly under US GAAP, which is why American articles still sell it as a tax saving.
Uganda's Income Tax Act points the same way. For stock that cannot be identified item by item, section 46 allows two methods. Its words are "the first-in-first-out method or the average cost method" (URA's July 2021 reprint).
For a shop in Uganda, LIFO is off the table for the accounts and for the tax return.
A worked example: one quarter of sugar in UGX
For example, a sugar wholesaler in Kampala buys 50 kg bags three times in one quarter, each time at a higher price. She sells every bag at UGX 230,000. The figures are illustrative, not a real shop's.
| Date | Movement | Bags | Cost per bag (UGX) | Bags on hand after |
|---|---|---|---|---|
| 1 July | Bought | 100 | 180,000 | 100 |
| July | Sold | 80 | by method | 20 |
| 15 August | Bought | 100 | 195,000 | 120 |
| August | Sold | 70 | by method | 50 |
| 20 September | Bought | 50 | 210,000 | 100 |
| September | Sold | 30 | by method | 70 |
She bought 250 bags for UGX 48,000,000 and sold 180 of them for UGX 41,400,000. Seventy bags are left at the end of September. Each method splits the UGX 48,000,000 differently between what was sold and what is left.
| Method | Cost of goods sold | Closing stock, 70 bags | Gross profit |
|---|---|---|---|
| FIFO | 33,600,000 | 14,400,000 | 7,800,000 |
| Moving average (reworked after each delivery) | 33,912,500 | 14,087,500 | 7,487,500 |
| Periodic weighted average (once for the quarter) | 34,560,000 | 13,440,000 | 6,840,000 |
| LIFO, for comparison only (not allowed under IFRS) | 35,400,000 | 12,600,000 | 6,000,000 |
How each figure is worked out
- FIFO: the 180 bags sold are the first 100 at 180,000 and then 80 at 195,000. The 70 left are 20 at 195,000 and 50 at 210,000.
- Periodic weighted average: UGX 48,000,000 ÷ 250 bags = UGX 192,000 a bag, applied to all 180 sold and all 70 left.
- Moving average: the average is reworked after each delivery. On 15 August, 20 bags at 180,000 plus 100 at 195,000 make 120 bags worth UGX 23,100,000, or 192,500 a bag. On 20 September it becomes 201,250.
- LIFO: the 180 bags sold are costed from the newest purchase backwards, which leaves the 70 oldest bags at 180,000.
The moving average formula is: new average cost = (value of stock on hand + cost of the new delivery) ÷ (units on hand + units delivered). CFI's guide to the weighted average cost method walks through the periodic version.
FIFO reports UGX 1,800,000 more gross profit than LIFO would, on the same sugar and the same cash. Prices rose about 17% in the quarter, and FIFO puts the cheap early bags into cost of sales. That extra profit is taxed, which is why LIFO stayed popular in the United States.
The cash is identical under every method. Only the split between this quarter's profit and the closing stock changes, and the difference reverses when the last bags are sold.
Which method should a small shop use?
Use FIFO for anything that expires, spoils or goes out of fashion, because it matches how those goods leave your shelves. Use weighted average for identical goods bought often at changing prices, where no one can tell which delivery a bag came from. Keep specific identification for one-off, high-value items.
Whatever you pick, keep it. IAS 2 requires the same formula for inventories of a similar nature and use. Uganda's Income Tax Act lets you change method "only with the written permission of the Commissioner".
A shop may still use FIFO for its dairy fridge and weighted average for its bulk rice, because those goods differ in nature.
Do not choose a method to cut tax. The method that lowers reported profit most when prices rise is LIFO, and neither IFRS nor Uganda's tax law allows it. If the goal is cash, the levers are buying less of what moves slowly and avoiding overstocking and stockouts.
For a deeper comparison of the two flows, see FIFO vs LIFO.
The step most guides skip: lower of cost and net realisable value
After you apply a method, compare each item's cost with its net realisable value. That is the price the item will fetch, less the costs to finish and sell it. Carry whichever figure is lower.
IAS 2 requires this step, and Uganda's tax law values closing stock at "the lower of cost or market value".
For example, a leaking roof soaks 10 of the September bags in the wholesaler's store. They will sell for UGX 120,000 each after UGX 5,000 of re-bagging, so their net realisable value is UGX 115,000. Their FIFO cost is UGX 210,000, so she writes them down by 10 × 95,000 = UGX 950,000, as an expense of the quarter.
IFRS reverses a write-down if the selling price recovers, up to the original cost, while US GAAP does not. The bookkeeping steps are in our guide to inventory write-downs.
What goes into the cost of inventory, and what stays out
Cost is the purchase price plus import duties, taxes you cannot recover, and transport and handling to your shop. Trade discounts and rebates come off, and VAT you can claim back stays out. That is the list in paragraph 13.6 of IFRS for SMEs, and IAS 2 uses the same one.
| Item | Amount | Part of the inventory cost? |
|---|---|---|
| Supplier's price, before VAT | 90,000 | Yes |
| Trade discount for buying 20 cartons | minus 2,000 | Yes, deducted |
| Transport from Kampala, per carton | 4,000 | Yes |
| Offloading at the shop | 1,000 | Yes |
| VAT at 18% on 88,000, which the shop claims back | 15,840 | No |
| Share of the store room's rent | 1,500 | No: an expense of the month |
| Cost per carton | 93,000 | Carried in inventory |
Storage, selling and general office costs go to expenses in the period they arise, under paragraph 13.13 of the IFRS Foundation's module on inventories for SMEs. They are part of your inventory holding cost, not part of the stock's value.
How to value your inventory in ArmPOS
ArmPOS keeps the quantities and costs as you buy and sell, and its reports show profit under both methods IFRS allows. The steps below follow the screens in the Help center.
- Give every product its cost. When you add a product, Product Cost is what you pay and Retail Price is what customers pay.
- Record each delivery as a purchase. On Purchases › Create Purchase, each line shows its Net Unit Cost, and the pencil changes the cost for that purchase. The stock enters the warehouse when the status is received.
- Compare FIFO and average cost. Reports › Profit and Loss ends with two tiles, Net Profit (FIFO) and Net Profit (Average Cost). Read the one your accountant uses, every time.
- Read the stock value. Reports › Inventory Valuation multiplies each product's STOCK ON HAND by its Cost to give its ASSET VALUE, for one warehouse or all.
- Check batch costs. For goods tracked by batch, Reports › Batch Register lists each batch with its quantity, cost and supplier. See batches and expiry dates.
- Take damaged goods out. A damage removes the stock and keeps the record, but it books nothing in Accounting. Record the write-down there as well.
One limit to know: Inventory Valuation uses one cost per product, not a stack of FIFO layers. That is close when the product's cost is your latest purchase price and prices are steady.
IFRS for SMEs (paragraph 13.16) accepts the most recent purchase price only "if the result approximates cost". After a big price move, ask your accountant to adjust the year-end figure.
Frequently asked questions
What are the main inventory valuation methods?
FIFO, weighted average cost and specific identification are the three methods IFRS allows. LIFO is a fourth, allowed mainly under US GAAP. Shortcuts such as the retail method or standard cost are acceptable only when the result approximates cost.
Is LIFO allowed under IFRS?
No. IAS 2 has not allowed LIFO since its 2003 revision, and IFRS for SMEs prohibits it in paragraph 13.18. A business reporting under IFRS uses FIFO, weighted average or specific identification.
Which inventory valuation method gives the highest profit?
When prices are rising, FIFO gives the highest profit and the highest closing stock, and when prices fall it gives the lowest. In the sugar example, FIFO showed UGX 960,000 more gross profit than the periodic average.
Can I change my inventory valuation method?
Only for a good reason, and you then apply the new method consistently. Your accounts must explain the change, and in Uganda the tax method changes only with the Commissioner's written permission. Ask your accountant before you switch.
Does inventory value include VAT?
Not when you can claim the VAT back from the tax authority. Only taxes you cannot recover belong in the cost of inventory.
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