What is FIFO?
First In, First Out, also known as FIFO, is a valuation method for assets or inventories. Under the FIFO method, the goods that are produced first are disposed of first. The FIFO method is also provided in the Indian accounting standard for inventory valuation. It is the most common, simple, and easy method of inventory valuation used by companies. Under this method, the inventory bought first must be sold first. Assets remaining in inventory are matched with the most recently purchased assets. During inflation, the FIFO method produces a higher value of the closing inventory, a lower cost of goods sold, and a higher gross profit. However, this model does not offer tax advantages, and it also fails to present an accurate depiction of the costs of the inventory when there is a rapid increase in prices.
Geeky Takeaways:
- FIFO stands for First In, First Out, a valuation method for raw materials and inventory.
- In the FIFO method, the goods that are produced first are disposed of first.
- The FIFO method is approved by Accounting Standard 2 and also by the Income Tax Act of 1961.
- 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method creates a system to sell the oldest inventory, which helps the organization reduce the risk of products getting outdated or storing products that are no longer usable, i.e., it is highly used in businesses that deal in perishable goods.
Table of Content
- How Does FIFO Work?
- How to Calculate COGS in the FIFO Method?
- Examples of the FIFO Method
- Advantages of FIFO
- Disadvantages of FIFO
- Difference between FIFO and LIFO
- Frequently Asked Questions (FAQs)
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