For reporting purposes, FIFO assumes that assets with the oldest costs are included in the income statement’s cost of goods sold (COGS). So, if you sell a product, the cost of goods sold by using the FIFO method is the value of the oldest inventory. FIFO is one of the most popular in inventory valuation methods.
Using the FIFO method has some significant advantages:
Let’s understand how FIFO is used to calculate Cost of Goods Sold (COGS).
|Buys an Item||$100|
|Buys the same item after inflation||$150|
|Sells an item for $175||-$100|
In the FIFO method, when calculating profit, its initial/oldest purchasing cost is subtracted from its selling price to calculate the reported profit.
For a more in depth understanding of FIFO and a comparison to LIFO, check out our blog on the subject.