How Does FIFO Work?
1. The FIFO method assumes that the first items manufactured or purchased are the first items sold and that the cost of those items is the cost of goods sold.
2. Since inventory is an essential part of a business, it also impacts the calculation of COGS at the end of the accounting period or fiscal year. Inventory valuation has a significant effect on balance sheets and inventory write-offs.
3. As inflation is present in the market, the more recently procured inventory costs more than the older inventory. While using the FIFO method, since the inventory received earlier is sold first, which typically has a lower value than the recent one, the ending inventory tends to be worth a greater value.
4. Under the FIFO method, the demands are fulfilled from the older inventory, and the cost of such inventory is also calculated at the earlier procured rates. Generally, when any business has a short shelf life, which is perishable in nature, or which tends to go obsolete quickly, the FIFO method comes with the dual advantage of proper inventory management and also provides an easy method for calculating ending inventory value.
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