Glossary

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First In First Out (FIFO)

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FIFO stands for “First In, First Out,” and it is a method of inventory valuation used in accounting. The FIFO method assumes that the first items (or units) added to an inventory are the first ones to be sold or used. In other words, the costs associated with the oldest inventory are matched with revenue first before moving on to more recently acquired inventory. Here’s how the FIFO method works: 1: First In: The cost of the earliest inventory purchases is used to calculate the cost of goods sold (COGS) when items are sold. 2: First Out: The cost of the more recently acquired inventory remains in the ending inventory on the balance sheet until the earlier inventory is depleted. This method is based on the assumption that items in inventory are used or sold in the order in which they are acquired. In times of rising prices, using FIFO for inventory valuation can result in a lower cost of goods sold and a higher ending inventory value on the balance sheet, which, in turn, affects the calculation of gross profit and net income. The FIFO method is one of several inventory valuation methods, with others including LIFO (Last In, First Out) and average cost. The choice of inventory valuation method can impact a company’s financial statements and income taxes. The selection of a specific method is often influenced by factors such as industry norms, tax regulations, and management preferences. In some jurisdictions, there may be specific rules or restrictions regarding the use of certain inventory valuation methods.

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