Inventory Accounting Questions

FIFO (First-In-First-Out) assumes you sell your oldest inventory first, which often matches physical reality for perishable goods or seasonal items. Weighted average cost spreads price fluctuations across all units, giving you smoother financial statements when your purchase prices bounce around. FIFO typically results in higher profits during inflation because older, cheaper costs flow to COGS, while weighted average sits somewhere in the middle—it’s less extreme but also less reflective of actual product movement.

Yes, but it’s not simple. CRA requires you to apply for permission to change your accounting method, and you’ll need to restate your prior year financials. Most businesses pick a method and stick with it for years because the administrative work and potential tax adjustments aren’t worth frequent switching. Choose carefully at the start—think about your inventory turnover, price volatility, and what method actually reflects how you physically move stock.

Annual full physical counts are the standard for tax and audit purposes, but many businesses do quarterly cycle counts to catch shrinkage and data entry errors early. If you’re using perpetual inventory tracking (updating counts in real-time), you’ll spot discrepancies faster than with periodic systems that only count once a year. The bigger your inventory and the higher your shrink rate, the more frequently you should count.

Absolutely. During inflationary periods, FIFO pushes lower historical costs to COGS, which reduces your taxable income less than weighted average would. This means lower tax bills under FIFO when prices are rising, but higher income recognition. CRA won’t let you cherry-pick methods for tax advantage alone—your choice must be consistent and defensible based on how you actually operate. It’s worth running both scenarios with your accountant to see the impact before you decide.

Perpetual systems update inventory counts continuously as sales and purchases happen—you know your stock levels in real-time and can apply your accounting method (FIFO or weighted average) to each transaction. Periodic systems count inventory only at specific intervals, usually year-end, and calculate COGS based on that snapshot. Perpetual is more accurate and catches shrinkage faster, but costs more to maintain. Periodic is simpler and cheaper but leaves you blind to stockouts or theft between counts.

You record a write-down expense when inventory loses value—either because it’s damaged, obsolete, or marked down for clearance. Document the reason and adjust your inventory valuation accordingly in the accounting records. CRA wants to see that you’re not just inflating inventory value to reduce COGS; if items are sitting on your shelves unsold or in poor condition, they don’t represent real asset value. This hits your profit in the period you discover the issue, not when you eventually sell or scrap the items.