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The First-in, First-out Method (FIFO) | FIFO Inventory Method
Overview of the First-in, First-out Method
The FIFO inventory method for inventory valuation assumes that the first goods purchased are the first goods used or sold, regardless of the actual physical flow. This method most closely parallels the physical flow of the inventory units in most industries. The strength of this cost flow assumption lies in the inventory amount reported on the balance sheet. Because the earliest goods purchased are the first ones removed from the inventory account, the remaining balance is composed of items priced at the most recent cost. This yields results similar to those obtained under current cost accounting on the balance sheet. However, the FIFO method does not necessarily reflect the most accurate income figure as older, historical costs are being charged to cost of goods sold and matched against current revenues.
The FIFO inventory method is of particular use from an inventory valuation perspective in periods when costs are increasing, since it flushes the cost of older inventory items from the inventory records, leaving only those inventory items most recently purchased, along with their costs (which most closely approximate current market prices).
The FIFO method is allowed under both Generally Accepted Accounting Principles and International Financial Reporting Standards.
Example of the First-in, First-out Method
The following example illustrates the basic principles involved in the application of FIFO:
| Units available |
Units sold | Actual unit cost |
Actual total cost |
|
| Beginning inventory | 100 | -- | $2.10 | $210 |
| Sale | -- | 75 | -- | -- |
| Purchase | 150 | -- | 2.80 | 420 |
| Sale | -- | 100 | -- | -- |
| Purchase | 50 | -- | 3.00 | 150 |
| Total | 300 | 175 | $780 |
Given this data, the cost of goods sold and ending inventory balance are determined as follows:
| Units | Unit cost | Total cost | |
| Cost of goods sold | 100 | $2.10 | $210 |
| 75 | 2.80 | 210 | |
| 175 | 420 | ||
| Ending inventory | 50 | 3.00 | 150 |
| 75 | 2.80 | 210 | |
| 125 | 360 | ||
| Totals | 300 | $780 |
Notice that the total of the units in cost of goods sold and ending inventory, as well as the sum of their total costs, is equal to the goods available for sale and their respective total costs.
The FIFO method provides the same results under either the periodic or perpetual inventory system.
Related Topics
FIFO vs. LIFO accounting
Last-in first-out method
Specific identification method
Weighted average method
What are perpetual LIFO and periodic LIFO?