FIFO | Meaning and Definition

What is FIFO? 

The acronym FIFO stands for “First in, First out. It is a way of maintaining track of the worth of a firm’s or organization’s inventory, with the assumption that the stock that was introduced initially to the equities will likewise be eliminated eventually.

For taxation purposes, FIFO implies that the assets with the oldest expenses are included in the cost of goods sold in the income statement (COGS). The leftover stock resources are linked to the latest newly bought or manufactured resources.

For expense progression inferences, the FIFO method is utilized. The related costs with a product must be recognized as an expense as it progresses through further development phases and as final inventory items are sold in production. Under FIFO, the cost of items purchased first is assumed to be recognized first. Because the index has been evacuated from the company’s holding, the dollar value of the cumulative stock falls down during this method. The expenses of inventory can be evaluated in a category of procedures, one of which is the FIFO method.

Monetary expansion markets and price increases are common economic conditions. If the former expenditures are dedicated to the expense of commodities sold in this case, the former costs will potentially be contemplated lower than the newest inventories procured at existing extortionate prices. As a consequence of reduced expense, the gross revenue is greater. The conclusive inventory ratio is also exaggerated because the newest goods were acquired at commonly elevated rates.

Advantages of FIFO

Here are certain advantages of using FIFO method:

  • Ease of use and applicability- The applicability and usage of FIFO method is very easy and convenient.
  • Higher profit- The cost of goods usually increases with time as profit is calculated as the difference between the selling price and the cost.
  • Software Compatibility- Many organizations make use of software that follows FIFO method. So it is compatible with most of the software available.
  • Accurate analysis of cost- FIFO method helps to calculate the overall cost easily and accurately so that errors can be avoided. 
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