FIFO method for inventory valuation may increase income tax due as well as

showing true financial position of a business with respect to inventory during the
period of rising prices.”

Definition and Explanation:

The first in first out (FIFO) method of costing is used to introduce the subject
of materials costing. The FIFO method of costing issued materials follows the
principle that materials used should carry the actual experienced cost of the specific
units used. The methods assumes that materials are issued from theoldest
supply in stock and that the cost of those units when placed in stock is the cost of
those same units when issued. However, FIFO costing may be used even though
physical withdrawal is in a different order.

Advantages of First in First out (FIFO) Costing

Method:
Advantages claimed for first in first (FIFO) out costing method are:

1. Materials used are drawn from the cost record in a logical and systematic
manner.
2. Movement of materials 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.

FIFO method is recommended whenever:

1. The size and cost of units are large.

2. Materials are easily identified as belonging to a particular purchased lot.
3. Not more than two or three different receipts of the materials are on a
materials card at one time.
Related Terms:
First-In, First-Out (FIFO)

method of inventory valuation that assumes merchandise is sold in the order of its receipt. The first-price in is the first-price out.

Hence cost of sales is based on older dollars. Ending inventory is reflected at the most recent prices. Assume the following data

regarding inventory during the year:

Jan. 1 Inventory 150 units @ $ 8 = $1200
Feb. 20 Purchases 200 units @ $ 9 = 1800
Apr. 12 Purchases 250 units @ $10 = 2500
Sept. 20 Purchases 200 units @ $11 = 2200
Goods Available 800 $7700
Assume physical inventory on December 31 is 430 units. The year-end inventory valuation is:
Last purchase (Sept. 20) 200 units @ $11 = $2200
Next most recent purchase (Apr. 12) 230 units @ $10 = 2300
Total 430 $4500
First In, First Out (FIFO)

method of accounting for inventory whereby, quite literally, the inventory is assumed to be sold in the chronological order in which

it was purchased. For example, the following formula is used in computing the cost of goods sold:

Under the FIFO method, inventory costs flow from the oldest purchases forward, with beginning inventory as the starting point and

ending inventory representing the most recent purchases. The FIFO method contrasts with the LIFO or Last In First Out

(LIFO) method, which is FIFO in reverse. The significance of the difference becomes apparent when inflation or deflation affects

inventory prices. In an inflationary period, the FIFO method produces a higher ending inventory, a lower cost of goods sold figure,

and a higher gross profit. LIFO, on the other hand, produces a lower ending inventory, a higher cost of goods sold figure, and a

lower reported profit.

In accounting for the purchase and sale of securities for tax purposes, FIFO is assumed by the IRS unless it is advised of the use

of an alternative method.