In order to be able to calculate gains and losses where there have been several inflows and outflows, an inventory valuation method must be defined. This specifies which inflows are used to calculate gains and losses in the case of an outflow.
In practice there are various different inventory valuation methods.
The two most common methods are
- FiFo – First in First out
The holdings that were acquired first are recorded as sold first.
This method results in holding periods that are as long as possible. - Weighted average – weighted average method
This calculates the average acquisition price, with the prices for the individual inflows being weighted according to their volume.
There are also a number of other methods
- LiFo – Last in First out
The most recently acquired holdings are recorded as sold first.
This method results in holding periods that are as short as possible. - LoFo – Lowest in First out
The holdings with the lowest acquisition costs are recorded as sold first.
This method has the effect of maximising gains and minimising losses. - HiFo – Highest in First out
The holdings with the highest acquisition costs are recorded as sold first.
This method has the effect of minimising gains and maximising losses.