FIFO vs Weighted Average (and Why LIFO Is Banned in Canada)
Tutorly · Financial Accounting
FIFO vs Weighted Average (and Why LIFO Is Banned in Canada)
LIFO is not allowed in Canada because IFRS (and Canadian ASPE) prohibit it — it rarely matches how goods actually flow and can distort the balance sheet. That leaves two methods: FIFO (oldest costs go to COGS) and weighted average (a blended cost per unit). On the same data they give different ending inventory and COGS — here’s both, side by side.
The shared data
| Purchase | Units | Unit cost | Total |
|---|---|---|---|
| Beginning inventory | 100 | $10 | $1,000 |
| Purchase 1 | 200 | $12 | $2,400 |
| Purchase 2 | 200 | $15 | $3,000 |
| Goods available | 500 | $6,400 |
FIFO
Oldest costs leave first, so the ending 150 units are the newest (from Purchase 2 at $15):
Ending inventory = 150 × $15 = $2,250 → COGS = $6,400 − $2,250 = $4,150.
Weighted average
Blend all costs: $6,400 ÷ 500 units = $12.80 per unit.
Ending inventory = 150 × $12.80 = $1,920 → COGS = 350 × $12.80 = $4,480.
| Method | Ending inventory | COGS |
|---|---|---|
| FIFO | $2,250 | $4,150 |
| Weighted average | $1,920 | $4,480 |
| LIFO (banned in Canada) | Not permitted under IFRS / ASPE | |
Inventory costing on your exam? A tutor can drill FIFO and weighted average — periodic and perpetual — on your own data — book a session.
Why is LIFO not allowed in Canada?
IFRS (used by public companies) and ASPE both prohibit LIFO because it usually doesn’t reflect the physical flow of goods and can leave very old, unrealistic costs sitting on the balance sheet. In rising prices LIFO also minimizes reported income and inventory — handy for cutting US taxes, but not permitted here. So Canadian courses test FIFO and weighted average only — don’t waste time learning LIFO entries for a Canadian exam.
Frequently asked questions
Why is LIFO not allowed in Canada?
Because IFRS and Canadian ASPE prohibit it — LIFO rarely matches actual goods flow and can distort the balance sheet with outdated costs.
What’s the difference between FIFO and weighted average?
FIFO charges the oldest costs to COGS, leaving newest costs in ending inventory; weighted average uses one blended cost per unit for both.
Which gives higher income when prices rise?
FIFO — it puts older, cheaper costs into COGS, so COGS is lower and income higher; weighted average lands in between.
Do FIFO and weighted average ever give the same answer?
Yes — when unit costs don’t change over the period, both methods produce identical ending inventory and COGS.
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