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The First-in, First-out Method (FIFO) | FIFO Inventory

Method

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Overview of the First-in, First-out Method

Accounting Bestsellers

The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the

Accountants' Guidebook

first goods purchased are also the first goods sold. In most companies, this assumption

Accounting Controls

closely matches the actual flow of goods, and so is considered the most theoretically correct

Accounting for Managers

inventory valuation method. The FIFO flow concept is a logical one for a business to follow,

Accounting Procedures

since selling off the oldest goods first reduces the risk of obsolescence.

Bookkeeping Guidebook
Budgeting
Business Ratios
Cash Management
CFO Guidebook
Closing the Books

Under the FIFO method, the earliest goods purchased are the first ones removed from the
inventory account. This results in the remaining items in inventory being accounted for at

Controller Guidebook
Corporate Finance
Cost Accounting

the most recently incurred costs, so that the inventory asset recorded on the balance sheet

contains costs quite close to the most recent costs that could be obtained in the
marketplace. Conversely, this method also results in older historical costs being matched

Cost Management Guidebook

against current revenues and recorded in the cost of goods sold; this means that the gross

Credit & Collection Guidebook

margin does not necessarily reflect a proper matching of revenues and costs. For example,

Financial Analysis

in an inflationary environment, current-cost revenue dollars will be matched against older

Fixed Asset Accounting

and lower-cost inventory items, which yields the highest possible gross margin.

GAAP Guidebook
Hospitality Accounting

The FIFO method is allowed under both Generally Accepted Accounting Principles and

IFRS Guidebook

International Financial Reporting Standards.The FIFO method provides the same results

Interpretation of Financials

under either the periodic orperpetual inven

tory system.

Inventory Accounting
Investor Relations
Lean Accounting Guidebook

Example of the First-in, First-out Method

Milagro Corporation decides to use the FIFO method for the month of January. During that

Mergers & Acquisitions

Nonprofit Accounting
Payables Management
Payroll Management
Public Company Accounting
Operations Bestsellers

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month, it records the following transactions:

Sale

Quantity

Actual

Actual

Change

Unit Cost

Total Cost

+100

$210

-75

Purchase (layer 2)

+150

Constraint Management

Sale

-100

Human Resources Guidebook

Purchase (layer 3)

+50

Inventory Management

Ending inventory

Purchasing Guidebook

$21,000

280

42,000

300

= 125

15,000

The cost of goods sold in units is calculated as:

100 Beginning inventory + 200 Purchased 125 Ending inventory = 175 Units
Milagros controller uses the information in the preceding table to calculate the cost of goods
sold for January, as well as the cost of the inventory balance as of the end of January.

http://www.accountingtools.com/fifo-method[3/29/2015 11:40:23 AM]

Units

Unit Cost

Total Cost

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FIFO Method - AccountingTools

Cost of goods sold

FIFO layer 1

100

$210

FIFO layer 2

75

280

$21,000
21,000

175

Ending inventory

$42,000

FIFO layer 2

75

280

FIFO layer 3

50

300

125

$21,000
15,000
$36,000

Thus, the first FIFO layer, which was the beginning inventory layer, is completely used up
during the month, as well as half of Layer 2, leaving half of Layer 2 and all of Layer 3 to be
the sole components of the ending inventory.
Note that the $42,000 cost of goods sold and $36,000 ending inventory
equals the $78,000
combined total of beginning inventory and purchases during the month.
Related Topics
FIFO vs. LIFO accounting
Last-in first-out method
Specific identification method
Weighted average method
What are perpetual LIFO and periodic LIFO?

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