What is FIFO inventory valuation?

Reviewed by CA Apurav GargLast reviewed 26 Oct 2026

In short

FIFO (first in, first out) values stock as if the units bought first are sold first, so closing stock carries the latest purchase costs. Indian accounting standards allow it, or weighted average, for interchangeable stock.

What it is

When you buy the same product at different costs over time, you need a rule to decide which cost goes into cost of goods sold and which stays in closing stock. Indian accounting standards (AS 2, or Ind AS 2 for companies that follow Ind AS) allow two formulas for interchangeable items:

FIFO (first in, first out): the earliest costs are matched with the first sales.
Weighted average cost: every unit carries the average cost of the stock available.

LIFO (last in, first out) is not allowed. Items that are not interchangeable, such as goods made for one specific order, are valued at their own actual cost.

What goes into cost

Cost includes the purchase price, import duties and other taxes that cannot be recovered, inward freight, handling and other costs of bringing stock to its present location. GST you can claim as input tax credit is left out, because you get it back. This is why landed cost and stock value are closely linked.

Stock is then shown at the lower of cost and net realisable value: if a product can only be sold below cost, after deducting selling costs, it is written down.

Choosing and changing

Use the same formula for all stock of a similar nature and use.
Your accounting software must support the formula you choose. Most support both.
Changing formula is a change in accounting policy, made only for a good reason and explained in the accounts.
For income tax, ICDS II sets similar rules for valuing stock.

Why it matters for an ecommerce seller

Stock is often a D2C brand's largest asset. The formula affects reported gross margin, SKU-level profit and the stock figure lenders and investors look at. It does not change your cash or the units you hold, so reconcile book stock with marketplace and warehouse stock reports regularly.

Example in rupees

A brand buys and sells one SKU in a quarter:

Date	Event	Units	Cost per unit
1 Jul	Opening stock	100	₹200
15 Jul	Purchase	300	₹220
1 Sep	Purchase	200	₹250
Quarter	Units sold	450

FIFO: cost of units sold = 100 × ₹200 + 300 × ₹220 + 50 × ₹250 = ₹98,500. Closing stock = 150 × ₹250 = ₹37,500.

Weighted average: total cost ₹1,36,000 ÷ 600 units = about ₹226.67. Cost of units sold = about ₹1,02,000. Closing stock = about ₹34,000.

With rising purchase costs, FIFO shows a lower cost of goods sold and higher closing stock than weighted average. Either figure is then compared with net realisable value. The figures are illustrative.

Legal reference: AS 2 and Ind AS 2, Inventories; ICDS II, Valuation of Inventories

Want help applying this to your own accounts?

We handle bookkeeping, reconciliation, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.

General information only, not professional advice. Rules and rates change — check the official source before you act.