For QuickBooks users, choosing an inventory valuation method affects how inventory costs, margins, and taxes are reported. It may seem like a simple decision at first, but it becomes more important as a business grows.
FIFO (First In, First Out), Weighted Average Cost, and LIFO (Last In, First Out) determine which inventory costs are recorded as cost of goods sold and which remain in inventory. This choice directly influences reported profits, inventory values, and tax outcomes.
As inventory volume and order activity increase, keeping valuation accurate gets harder. More SKUs, changing costs, faster fulfillment, and multiple locations can strain basic inventory tracking.
This article explains how FIFO works, how it compares to Weighted Average Cost and LIFO, and why FIFO is the best choice for operations at scale. It also explains when extending QuickBooks with an inventory control and order management platform like Order Time becomes necessary.
FIFO, LIFO, and Weighted Average Cost are inventory valuation methods that determine how inventory costs are applied to the cost of goods sold and remaining inventory. They affect financial reporting and taxes, but they do not control how inventory physically moves through a warehouse.
Understanding these differences helps QuickBooks users choose a valuation method that aligns with both financial goals and the realities of inventory tracking.
FIFO assumes the oldest inventory costs are recorded as cost of goods sold first, leaving newer costs in inventory. This often results in inventory values that reflect more recent purchase prices and higher reported profits when costs are rising. FIFO is commonly viewed as easier to understand and maintain when inventory tracking is consistent.
LIFO assumes the most recent inventory costs are recorded as the cost of goods sold first, leaving older costs in inventory. This approach can increase the cost of goods sold when costs rise, which may reduce reported taxable income. LIFO requires more detailed and consistent inventory records to remain accurate over time.
Weighted Average Cost applies an average unit cost across inventory, rather than pulling from oldest or newest inventory layers. It can work in some QuickBooks Desktop setups, but it often becomes harder to interpret margin changes at scale because costs are blended together over time.
FIFO vs. LIFO decisions are closely tied to how financial results and tax obligations appear on paper. Each method affects the cost of goods sold, inventory values, and taxable income in different ways, especially when costs change over time.
With FIFO, older inventory costs are recorded as the cost of goods sold first. During periods of rising costs, this often results in lower cost of goods sold and higher reported profits. Inventory values on the balance sheet tend to reflect more recent purchase prices, which can make financial statements easier to interpret. However, higher reported profits may also lead to higher taxable income.
LIFO works in the opposite way. Newer, higher inventory costs are recorded as the cost of goods sold first, which can increase expenses during inflationary periods. This often reduces reported income and may lower tax liability in the short term. The tradeoff is that inventory values on the balance sheet may be based on older costs, which can make financial reporting less intuitive.
Weighted Average Cost impacts reporting differently because it blends inventory costs over time. However, since QuickBooks Online and OrderTime use FIFO valuation, this section focuses primarily on FIFO vs LIFO reporting and tax impact.
From a reporting standpoint, FIFO and LIFO influence key financial statements in different ways:
Tax considerations also differ between the two methods. FIFO is often preferred for its simplicity and alignment with financial reporting. LIFO can offer tax advantages when costs rise, but it comes with stricter record-keeping and compliance requirements that must be maintained consistently over time.
Regardless of which method is chosen, accurate reporting and tax outcomes depend on reliable inventory and order data. When inventory activity is not tracked consistently, FIFO or LIFO calculations can drift from reality, making financial results harder to explain and defend.
For QuickBooks users, valuation method options also depend on whether you are using Desktop or Online.
For most QuickBooks users, FIFO is the best choice, especially as inventory operations scale. It is simpler to maintain, easier to explain, and more practical for most real-world purchasing and fulfillment workflows.
That does not mean other valuation methods never apply. But as businesses grow, the challenge is rarely choosing a method in theory. The challenge is maintaining accuracy as inventory moves faster, costs change more often, and reporting expectations get higher. FIFO tends to hold up best under those conditions.
FIFO is typically the right fit when:
LIFO is rarely a good fit. It is uncommon, adds complexity, and is difficult to sustain as inventory operations grow. It also comes with limitations for tax use in the US and is not allowed under international accounting standards.
Weighted Average Cost may still be relevant for some QuickBooks Desktop users, since it is often the default valuation method. In those cases, the priority should be ensuring receiving, purchasing, and inventory activity are tracked consistently so average costs remain reliable over time.
Ultimately, FIFO is the best choice for most growing businesses because it supports valuation accuracy without adding unnecessary complexity. And when inventory activity becomes too detailed to manage in QuickBooks alone, extending your workflow with inventory and order management tools is often what makes FIFO sustainable long term.
For most QuickBooks users, FIFO is the best choice because it stays practical and consistent as inventory volume, order activity, and operational complexity increase.
Order Time supports FIFO-based valuation by keeping inventory and order data connected beyond QuickBooks. It uses FIFO by default, applies “Specific Identification FIFO” for scenarios like lot and serial tracking, and allows separate FIFO stacks by warehouse location.
The result is faster reporting, fewer valuation surprises, and FIFO-based inventory numbers you can actually trust as the business grows.
Want a deeper, practical framework for evaluating FIFO vs. LIFO at scale? Download A Strategic Guide To Inventory Valuation Methods for Growth to understand where valuation breaks down and what to address first.