Advantages of FIFO
1. Reduced Chances of Obsolete Products: The FIFO method creates a system to sell the oldest inventory, which helps the organization reduce the risk of products getting outdated or storing products that are no longer usable. FIFO helps the organization reduce waste, ensure that it is not left with any unsold inventory, and mitigate the risk of holding such unsold inventory.
2. Calculation of COGS: FIFO is seen as a great way to calculate the COGS by the management. Also, the FIFO method helps the company calculate the gross margin after selling out its oldest inventory first.
3. Alignment of Inventory Cost with the Market Value: The FIFO method provides a framework for the sale of the oldest product. First, the company determines the value of its in-hand inventory using the recently manufactured items. This helps the organization provide an accurate match of the inventory cost to the current market value and an exact idea of the replacement cost.
4. Fair Financial Documents: The FIFO system provides a precise picture of a company’s financial health, making it difficult for internal parties to manipulate the financial statements. Also, this information helps an organization lay out plans for the future.
5. Reduces the Impact of Inflation: The FIFO method lies in the assumption that the cost of purchasing new inventory is higher than the cost of purchasing old inventory. In the FIFO method, the potential impact of inflation is reduced.
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