What is First In, First Out ?
780 reads · Last updated: December 5, 2024
First In, First Out, commonly known as FIFO, is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first.For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statement's cost of goods sold (COGS). The remaining inventory assets are matched to the assets that are most recently purchased or produced.
Definition
First In, First Out, commonly known as FIFO, is an asset management and valuation method where the assets produced or purchased first are sold, used, or disposed of first. For tax purposes, FIFO assumes that the cost of the earliest assets is included in the cost of goods sold on the income statement. Remaining inventory assets are matched with the most recently purchased or produced assets.
Origin
The concept of FIFO originated in the accounting field and became widely used in the early 20th century. With the development of industrialization and the increasing need for inventory management, FIFO became a standard inventory management method, helping companies more accurately reflect inventory costs and profits.
Categories and Features
FIFO is primarily used in inventory management and accounting. Its features include being simple and easy to understand, suitable for market environments with stable prices. In rising price scenarios, FIFO results in lower cost of goods sold and higher reported profits. Conversely, in declining price scenarios, it may lead to higher cost of goods sold and lower profits.
Case Studies
Case 1: Walmart uses the FIFO method in its inventory management to ensure that fast-turnover goods are promptly restocked, reducing the accumulation of outdated products. Case 2: Apple Inc. employs the FIFO method in its financial reporting to reflect the rapid turnover of its high-tech products, ensuring the accuracy of its financial statements.
Common Issues
Common issues investors face when using FIFO include significant profit fluctuations during volatile price periods. Additionally, FIFO may not be suitable for all industries, particularly those with slower inventory turnover.
