Why Valuation Matters
When you sell a product, what was your cost? If you bought the same item at different prices over time -- $8 in January, $9 in March, $10 in June -- which cost do you use? The answer affects your reported profit, your tax liability, and your understanding of business performance.
FIFO: First In, First Out
How it works: You assume the oldest inventory is sold first. The cost of goods sold (COGS) uses the price of the earliest purchases.
Example: You bought 10 units at $8 and 10 units at $10. You sell 5 units. Under FIFO, your COGS is 5 x $8 = $40.
Best for: Most retail businesses, especially those with perishable or seasonal goods. It matches the physical flow of most stores (you sell older stock first).
Tax impact: In periods of rising prices, FIFO results in lower COGS and higher taxable income. You pay more in taxes but show higher profits.
LIFO: Last In, First Out
How it works: You assume the newest inventory is sold first. COGS uses the price of the most recent purchases.
Example: Same scenario. Under LIFO, your COGS is 5 x $10 = $50.
Best for: Businesses wanting to reduce tax liability during inflationary periods.
Tax impact: In periods of rising prices, LIFO results in higher COGS and lower taxable income. You pay less in taxes but show lower profits.
Important note: LIFO is allowed under U.S. GAAP but prohibited under IFRS (international standards). Consult your accountant.
Weighted Average Cost
How it works: You calculate the average cost of all units available during the period and apply that to both COGS and ending inventory.
Example: 10 units at $8 + 10 units at $10 = 20 units at average cost $9. Sell 5 units, COGS = 5 x $9 = $45.
Best for: Businesses with homogeneous products where specific identification is impractical.
What This Means for Your Clover Store
Most small retailers on Clover should use FIFO. It matches how you actually sell (older stock first), it is the simplest to implement, and it is accepted by both U.S. and international accounting standards.
The key takeaway: accurate inventory counts are essential regardless of which method you use. If your counts are wrong, your valuation is wrong, your COGS is wrong, and your financial statements are unreliable. Regular audits ensure the numbers your accountant works with are based on reality.
Talk to Your Accountant
Inventory valuation has real tax implications. Before choosing or changing your method, consult with a qualified accountant who understands your business. They can model the tax impact and recommend the best approach for your situation.