How can identical inventory purchases produce different reported gross profit?

Name the formulas and the reporting boundary

The IFRS Foundation’s IAS 2 overview describes FIFO and weighted-average formulas for ordinarily interchangeable inventory and measurement at the lower of cost and net realisable value. That overview also distinguishes specific identification for other inventory. It is not a universal description of every jurisdiction’s tax or accounting rules.

Here, compare FIFO with a periodic weighted average after all purchases are complete. This is a pair of alternative teaching policies, not a suggestion that a company may switch policies each period to improve profit. Assume identical interchangeable units, no opening stock, no purchase discounts or other costs, and no losses or returns initially.

Freeze the physical units and cash ledger

A fictional seller purchases 100 units at 10 each and another 100 at 14 each. Available inventory is 200 units costing 1,000+1,400=2,400. It then sells 150 units at 20 each, collecting 3,000. Exactly 50 physical units remain under either cost-flow formula.

Assume the 2,400 purchase cost was paid in cash and every sale was collected. Net cash from those stipulated purchase and sale events is 600 for both policies. This narrow cash bridge excludes rent, wages, tax and every other transaction; it is not free cash flow for the business.

Allocate the same cost in two ways

FIFO assigns the first 100 units’1,000 cost plus 50 of the second batch at 14, or 700, to cost of sales. Cost of sales is therefore 1,700; the remaining 50 units carry 700. Gross profit is 3,000−1,700=1,300.

The periodic weighted-average unit cost is 2,400/200=12. Cost of 150 sold units is 1,800; ending inventory is 50×12=600. Gross profit is 1,200. Each allocation reconciles to total available cost 2,400:1,700+700 or 1,800+600. The 100 gross-profit difference is matched by the 100 ending-inventory difference.

Test a separate write-down control

Now add an explicitly separate hypothetical event: after those sales, the remaining units are damaged, and their stipulated net realisable value becomes 9 per unit, or 450 in total. This is an invented reassessment, not a statement about the earlier sales price or an actual product.

Under the stated lower-of-cost-and-net-realisable-value control, FIFO’s 700 carrying amount would need a 250 reduction; weighted average’s 600 would need 150. With those losses recognized in the same modeled period, the 1,300 or 1,200 gross-profit amount less its respective reduction gives 1,050 before other expenses. Presentation of the loss must follow the actual reporting policy.

Avoid an operating-performance inference

The initial higher FIFO gross profit in this rising-purchase-cost example did not establish better pricing, sales volume or cash collection. All of those inputs were identical. A formula comparison should therefore reconcile both the income statement and ending inventory.

A perpetual moving average can differ from the periodic average when purchases and sales are interleaved. Actual inventory also needs appropriate cost scope, consistent policy and impairment analysis. This page does not determine a tax method, recommend a policy change or claim compliance for a real company.

Method, sources, and limits

The purchases, sale and damaged-stock control are original hypothetical teaching inputs, recomputed on 27 October 2026. The source supports the stated IFRS context, not these invented estimates or all possible accounting treatments. AI-assisted drafting is not qualified human accounting or tax review.