FIFO

FIFO and LIFO accounting systems are the accounting techniques which are utilized in managing financial and inventory matters involving the amount of cash a firm has tied up within the inventory of raw materials, produced goods, components, parts, or feed stocks.

FIFO or First In, First Out, which means the oldest inventory goods are posted as sold first however don’t essentially mean that the actual latest physical object has been found out and sold; this is just an inventory method.

The FIFO (first in first out) accounting technique is one method to calculate the cost basis. First in first out is the most common and simplest method used in accounting for calculating the cost basis. Once you have selected any accounting technique or method, you have to continue to use the same technique or method for the life of the related investment.

While selling shares utilizing the first in first out method the earliest bought shares are those that get sold first. The cost basis or basis is the amount which is spent on accumulating the sold shares. Manager or accountant includes items such as any loads related with the purchases or commission fees in the basis. Cost basis is adjusted for any return of capital distributions or account fees as well. The return of capital distributions would lessen the cost basis, whereas the account fees would increase the cost basis. Manager or investment adviser would subtract off loads related or commission fees with the sell in order to get the sell value. The capital gain gained equals the sell value minus the cost basis.

LIFO or last-in, first-out, which means the newest produced goods are posted as sold first. Most of the US companies started using this method since 1970, in order to reduce their income taxes during the time of inflation.

Questionnaire:

• What are FIFO and LIFO?
• Why FIFO is used as common method for calculating cost basis?