FIFO

First in First out (FIFO) is an asset management and inventory valuation. It is an inventory valuation method which assumes that the first items placed in inventory are the first sold. FIFO method may be used by an individual or a corporation. Stocks issued by an organization for e.g. sale are assumed for calculating the cost of sales and it is to be issued from the oldest available stocks.

The FIFO method of costing issuing materials follows the principle that materials that carries the actual experienced cost of the specific units used. This method assumes that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost of those same units when issued. FIFO costing is even used though physical withdrawal is in a different order.

FIFO has many advantages to businesses which includes higher gross profit amounts, increased inventory value on the balance sheet and fewer opportunities for obsolete inventory write-offs. The valuation of inventory is based on the company’s internal policy and the type of inventory sold to consumers. Companies maintain detailed records in their accounting ledger in order to follow this principle. The materials here are drawn from the cost record in a logical and systematic manner. The movement of materials is in a continuous, orderly, single file manner represents a condition necessary to and consistent with efficient materials control, particularly for materials subject to deterioration, decay and quality are style changes.

For taxation the FIFO assumes that the assets that are remaining in inventory are matched to the assets that are most recently purchased or produced. With this assumption there is a number of tax minimization strategies associated with using the FIFO asset-management and valuation method. FIFO method is recommended and used whenever the size and cost of units are large; the materials are easily identified as belonging to a particular purchased lot and when not more than two or three different receipts of the materials are on a materials card at one time.

Questions

• What is a FIFO method?
• What are the advantages of FIFO?