The FIFO method, or First-In, First-Out, is a fundamental inventory valuation and cost flow assumption used in accounting. It assumes that the oldest inventory items are sold first, and the most recent purchases remain in stock. This method is widely used across industries for financial reporting and inventory management.
What Does FIFO Mean?
FIFO (First-In, First-Out) means the goods or materials that are acquired first are also the first to be sold or used. This logical flow closely follows the actual physical movement of inventory, especially for perishable goods or time-sensitive products.
First-In First-Out Method in Practice
FIFO is commonly used in:
=) Retail and grocery (oldest stock sold first)
=) Manufacturing (managing raw materials)
=) Pharmaceuticals (expiry-date sensitive)
It aligns with the actual flow of goods and provides a more accurate representation of inventory value on the balance sheet.
Why Use FIFO Method?
:) Reflects the actual flow of goods
:) Provides a more realistic inventory valuation
:) Yields higher net income during rising prices
:) Offers clarity and consistency in reporting
FIFO Method Video Explanation
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| You tube Detailed Video |
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3 Comments
Nice write-up! It’d be great to see how each method affects decision-making in manufacturing vs retail.
ReplyDeleteThe ledger example was super helpful—finally clicked for me."
ReplyDeleteGreat to hear! Real examples always bring theory to life.
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