Inventory valuation is the accounting method that decides which cost is assigned to the units you sell (cost of goods sold) and which stays in inventory, when you have bought the same product at different costs over time. The three common methods are FIFO (first in, first out), LIFO (last in, first out), and weighted average. The choice affects your reported COGS, profit, and inventory value.
Which inventory valuation method is best for Amazon sellers?
Most FBA sellers use FIFO or weighted average. FIFO matches the physical reality of selling oldest stock first and is widely accepted; weighted average is simple and smooths cost swings. LIFO is allowed only under US accounting rules, is uncommon for small sellers, and adds complexity, so it is rarely the right choice. Pick one, apply it consistently, and confirm with your accountant.
Andrew Erickson is the founder of Inventory Hero. He has spent years working with Amazon FBA sellers on demand forecasting, restock planning, and the cash flow side of running a private-label brand. Inventory Hero exists because every spreadsheet-based inventory system he tried eventually broke — usually right before Q4.
When your unit costs change over time, the method changes which cost hits COGS. In a period of rising costs, FIFO expenses cheaper older stock, so COGS is lower and reported profit higher; LIFO expenses pricier newer stock, so COGS is higher and profit lower. Weighted average lands in between. That difference flows straight to taxable income, which is why the choice matters.
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Inventory valuation is the accounting method that decides which cost flows to cost of goods sold when you have bought the same SKU at different prices over time. The short version: FIFO expenses your oldest cost first, LIFO your newest first, and weighted average blends them, and the choice changes your reported COGS and profit when costs move. Most FBA sellers use FIFO or weighted average. This is a practical overview, not tax advice. Below is what each method means, how it moves your numbers, and how to choose.
Say you bought 100 units at 8 dollars and later 100 more at 10 dollars, and now you sell 100. Which cost do you record as COGS: the 8 dollar batch, the 10 dollar batch, or a blend? That is the entire question inventory valuation answers, and the method you pick determines your COGS, your remaining inventory value, and therefore your profit.
Because landed cost shifts with freight, duties, and currency, your per-unit cost genuinely varies between orders, so this is not a hypothetical; it is a choice you have to make and apply consistently.
LIFO assumes the most recently bought units sell first, so the newest cost flows to COGS:
In the example, selling 100 units expenses the 10 dollar batch, so COGS is 1,000 dollars.
In rising-cost periods, LIFO reports higher COGS and lower profit, which can lower taxable income.
It is US-only under accounting rules, not permitted under international standards, and it adds real complexity.
For most small and mid-size FBA sellers, LIFO's complexity and limited acceptance outweigh its tax angle, so it is rarely the right pick, and it is worth a deliberate look only if you have a specific US tax reason to consider it.
Same sale, three different COGS, three different profits, and three different taxable incomes. And notice the last column: FIFO's lower COGS is not free money, it comes with a higher remaining inventory value on your balance sheet. You are choosing which number is bigger, your profit or your asset, which is exactly why the choice is not cosmetic; it flows straight to your bottom line and your tax bill, especially when costs are moving.
For most FBA sellers, the practical choice is FIFO or weighted average:
FIFO if you want your books to match how stock physically moves and you are comfortable tracking cost layers.
Weighted average if you want simplicity and smoothing.
LIFO only if your accountant specifically recommends it for a US tax reason, which is uncommon for small sellers.
But the rule that matters most is consistency. Whichever method you pick, apply it the same way every period, because switching methods breaks the comparability of your numbers and raises questions at tax time; a mid-year switch without accountant sign-off can force a restatement that surfaces in your year-end tax prep, not just your books. Confirm the choice once, then hold it, and let it feed a clean net profit margin.
Choosing a method is the easy part; applying it consistently is where sellers slip:
Record landed cost per shipment. Each inbound batch has its own true landed cost; capture it (the landed cost calculator helps), because that is what the method flows to COGS.
Let a system track the layers. FIFO and weighted average across many SKUs and shipments are painful by hand, and each receipt and sale is really a journal entry at a specific cost. Accounting or inventory software that carries cost per receipt keeps the method accurate without spreadsheet gymnastics.
Reconcile at period close. Tie your on-hand units and their costs to your books so ending inventory (and therefore COGS) is right. See calculating ending inventory.
Do not switch mid-stream. Changing methods breaks comparability and draws tax scrutiny; if you must change, do it deliberately with your accountant and document why.
The method is only as good as the discipline behind it, which is why most growing sellers let software carry the cost layers and reconcile on a schedule.
Inventory valuation decides which cost flows to COGS, FIFO (oldest), LIFO (newest), or weighted average (blended), and the method changes your profit and taxable income when unit costs move. Most FBA sellers land on FIFO or weighted average; LIFO is a rare, US-only special case. Pick one, apply it consistently, and confirm with your accountant. It is a core piece of inventory accounting and of Amazon seller accounting overall.