The way you value your inventory directly affects your reported profit, your tax liability, and your pricing decisions. Two of the most common methods are FIFO (First In, First Out) and LIFO (Last In, First Out).
This guide explains both methods in plain English, using examples relevant to Nigerian business contexts.
What is FIFO?
FIFO assumes the first items purchased are the first items sold. So when you sell a product, you deduct the cost of your oldest units first.
Example: A supermarket in Abuja buys 100 bags of rice in January at ₦35,000/bag. In March, prices rise and they buy another 100 at ₦42,000/bag. Under FIFO, the first bags sold are costed at ₦35,000.
Pros of FIFO
- Matches physical reality (older stock usually sold first)
- Gives higher closing inventory value (great for attracting investors or loans)
- Legally required for perishables in many countries
Cons of FIFO
- Reports higher profit during inflation → higher tax
- May not accurately reflect current replacement cost
What is LIFO?
LIFO assumes the last items purchased are the first ones sold. Using the same example, rice sold is costed at ₦42,000/bag (the most recent purchase price).
Pros of LIFO
- Closer to current replacement cost
- Reports lower profit during inflation → lower tax
- Useful for non-perishables (e.g., electronics, hardware)
Cons of LIFO
- Not permitted under IFRS (the standard used in Nigeria)
- Closes inventory valued at very old — sometimes unrealistically low — prices
- Can mislead lenders reviewing your balance sheet
Which Should You Use?
| Business type | Recommended method | |----------------------|--------------------| | Food & beverages | FIFO (perishables must go first) | | Fashion & clothing | FIFO (trends change, older stock loses value) | | Electronics | FIFO (tech depreciates fast) | | Hardware/construction| Weighted average cost is often more practical | | Pharmaceuticals | FIFO (expiry compliance) |
For most Nigerian retailers, FIFO or a Weighted Average Cost (WAC) method is most practical and compliant with Nigerian GAAP and IFRS standards.
Make sure your inventory system records purchase costs accurately. Inventino tracks cost per unit on every purchase so your gross margin reports are always reliable.