What is FIFO?

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:

  • It is more realistic because most businesses ship older stock first to avoid depreciation of value or spoilage.
  • FIFO increases the value of your purchased inventory and company net worth in times of inflation. As a result, you apply a higher asset value.

Example of FIFO

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
Reported profit $75

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.