What is FIFO

FIFO stands for "First In, First Out," and it is a method of inventory management and valuation. Under the FIFO method, the first inventory items that are purchased or produced are assumed to be the first items sold or used, and the most recent items are assumed to be the items that remain in inventory.

For example, if a company produces 100 units of a product and sells 60 units, under the FIFO method, the cost of the 60 units sold would be based on the cost of the first 60 units produced, and the cost of the remaining 40 units in inventory would be based on the cost of the last 40 units produced. This is in contrast to the LIFO (Last In, First Out) method, which assumes that the most recently produced or purchased inventory items are the first to be sold or used.

The use of the FIFO method can have an impact on a company's financial statements. For example, if prices are increasing, the use of the FIFO method can result in lower cost of goods sold and higher profits, as the cost of the older, lower-priced inventory items is used in the calculation of cost of goods sold. Conversely, the use of the LIFO method can result in higher cost of goods sold and lower profits in a period of rising prices.

Overall, the choice of inventory valuation method can have significant implications for a company's financial statements and tax liabilities, and it is important for businesses to carefully consider their options and consult with accounting professionals as needed.