FIFO Stock Valuation for Resellers, With a Worked Example

At the end of the year most resellers still have stock on the shelves. That stock cost money, but you haven't sold it yet, so it isn't part of this year's cost of sales. To work out your real profit, you need to put a value on it. FIFO, first in first out, is the simplest way to do that and the one most small resellers use.

What FIFO means

FIFO assumes the first items you bought are the first ones you sold. Your cost of sales uses your oldest purchase prices, and the stock left at the end of the year is valued at your most recent ones.

It doesn't matter which physical pair or which shirt actually left the shelf. FIFO is a rule for the numbers, so you don't have to track every single unit.

A worked example

Say you resell one model of trainers and bought them in three batches during the year:

By the end of the year you've sold 18 pairs, so 7 are left.

Cost of sales with FIFO. The 18 pairs sold come from the oldest batches first: all 10 from March (£600) and 8 from June (£560). Your cost of sales is £1,160.

Closing stock with FIFO. The 7 pairs left are the newest: 2 from June (£140) and 5 from September (£400). Your closing stock is £540.

The two add up to £1,700, what you spent. That's the check: cost of sales plus closing stock always equals what you bought, plus any stock you started the year with.

If those 18 pairs sold for £2,400 in total, your gross profit is £2,400 minus £1,160, which is £1,240, before fees and postage. Counting all £1,700 you spent as this year's cost would make your profit look £540 lower than it really is.

The FIFO stock calculator does this for as many batches as you enter.

FIFO or average cost?

The other common method is average cost: divide what you spent by the number of units. In the example that's £1,700 ÷ 25 = £68 a pair, so cost of sales is 18 × £68 = £1,224 and closing stock is 7 × £68 = £476.

When prices rise during the year, as they did here, FIFO gives a higher closing stock and a higher profit this year. Next year it evens out, because that more valuable stock becomes next year's cost of sales. Both methods are accepted. What matters is picking one and keeping it from year to year.

LIFO, last in first out, is the method to avoid in the UK. HMRC's manual says it does not truly reflect a business's profit for tax purposes.

When stock is worth less than you paid

Stock is valued at the lower of what it cost and what you can realistically sell it for, after the costs of selling it. If two of the September pairs are now selling for £65 and the fees and postage come to £10, each is worth £55 to you, not the £80 you paid. Value those two at £55 each and the closing stock drops by £50.

Be honest about it. Writing stock down because it's genuinely worth less is fine. Writing it down to lower this year's profit isn't.

Do you need this for your tax return?

It depends on how you work out your profit.

• UK sole traders on cash basis. Since April 2024, cash basis is the standard method. You deduct stock when you pay for it, so closing stock doesn't change your taxable profit. You still want the figure to know how your business is really doing.
• UK traditional accounting and limited companies. Closing stock has to be valued every year and goes into your accounts. FIFO is a safe choice.
• France. On the micro-entreprise regime you're taxed on turnover, so stock value doesn't affect your tax. On the régime réel, you take a year-end inventory and value it.

If you're filing a UK tax return, our Self Assessment checklist for resellers covers the rest.

Make the count easy

Valuing stock is quick if you already know what you have and what each batch cost. Count what's left on the last day of your accounting year, match it to your purchase records, and keep the count with your accounts. An inventory app that records the cost of each item when you add it does most of this for you.