FIFO
From Financial Literacy Wiki
FIFO is an asset-management and valuation method in which the assets produced or acquired first are sold or used first.
Managing Inventory
FIFO is commonly seen in accounting when it comes to managing inventory. Basically what it means is when accounting for COGS, inventory that are stored first would be used up first.
For instance, if the current inventory of Company XYZ is broken down into the following
- Purchased on 1-Mar-2009, Cost of Each Unit of Inventory is $30, Total Units is 500
- Purchased on 1-Apr-2009, Cost of Each Unit of Inventory is $40, Total Units is 200
- Purchased on 1-May-2009, Cost of Each Unit of Inventory is $20, Total Units is 700
If at the end of the period the total unit of Inventory used is 600, using a FIFO approach, the COGS would be ($30 X 500)+ ($40 X 100)= $19,000.
Investors are advised to check on the company's accounting policy to see if the FIFO approach is adopted as it has implications on the Net Profits earned through the accounting of COGS. This is especially true for companies that store large amount of inventory.
