FIFO

(noun)

First in, first out (accounting).

Related Terms

Examples of FIFO in the following topics:

  • Adjusting for LIFO Reserve

    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • A company can always convert from LIFO to FIFO, which is important if you are trying to compare companies when they use different accounting methods.
    • When dealing with valuing a company using ratios, one must also convert all numbers to FIFO method for easy comparison.

  • FIFO Method

    • FIFO stands for "first-in, first-out," and assumes that the costs of the first goods purchased are charged to cost of goods sold.
    • Such items as fresh dairy products, fruits, and vegetables should be sold on a FIFO basis.
    • Periods of Rising Prices (Inflation)FIFO (+) Higher value of inventory (-) Lower cost of goods sold
    • Periods of Falling Prices (Deflation)FIFO (-) Lower value of inventory (+) Higher cost of goods sold
    • Describe how a company would value inventory under the FIFO method

  • The LIFO Reserve

    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • Last-In First-Out (LIFO) is the opposite of First-In First-Out (FIFO).
    • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
    • Such a reserve (an asset or a contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions.
    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.

  • Advantages of LIFO

    • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
    • FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks.
    • FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.
    • FIFO: (+) Higher value of inventory (-) Lower cost of goods sold
    • FIFO: (-) Lower value of inventory (+) Higher cost of goods sold

  • Impacts of Costing Methods on Financial Statements

    • The FIFO method assumes that the first unit in inventory is the first until sold.
    • When the item is sold on Wednesday FIFO records the cost of goods sold for those items as $5.
    • During periods of inflation, the FIFO gives a more accurate value for ending inventory on the balance sheet.
    • With average cost, the results fall in between FIFO and LIFO.
    • Differentiate between the FIFO, LIFO and Average Cost inventory valuation methods

  • Selecting an Inventory Method

    • All the advantages of FIFO occur because when a company sells goods, the first cost it removes from inventory are the oldest unit costs.
    • Under FIFO, purchases at the end of the period have no effect on cost of goods sold or net income ([fig:11053]]).
    • The disadvantages of FIFO include the recognition of paper profits and a heavier tax burden if used for tax purposes in periods of inflation.
    • Inventory is not as understated as under LIFO, but it is not as up-to-date as under FIFO.
    • Summarize the differences between LIFO, FIFO and Specific Identification and explain how a company would use that information to select an inventory method

  • Flow of Inventory Costs

    • However, with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
    • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve.
    • FIFO (+) Higher value of inventory (-) Lower cost of goods sold
    • FIFO (-) Lower value of inventory (+) Higher cost of goods sold
    • Discuss how a company uses LIFO or FIFO to calculate the cost of inventory

  • Cost Flow Assumptions

    • ., FIFO) are necessary to determine the cost of goods sold and ending inventory.
    • FIFO assigns first costs incurred to COGS (cost of goods sold) on the income statement.
    • FIFO also uses the least relevant cost for the income statement and underestimates or overestimates the cost of goods sold if prices are rising or falling, respectively.
    • Disallows manipulation by management and better estimation of the cost of goods sold than FIFO or LIFO if prices are rising or falling

  • Impact of Inventory Method on Financial Statement Analysis

    • First-In First-Out (FIFO) assumes that the items purchased or produced first are sold first.
    • Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve.
    • The LIFO reserve (an asset or contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions.
    • Under FIFO: Ending Inventory is higher, and Total Current Assets are higher; cost of goods sold is lower, and gross profit is higher.
    • Under FIFO: Ending Inventory is lower, and total current assets are lower; cost of goods sold is higher, and gross profit is lower.

  • Comparability

    • If a company uses LIFO, the recorded amount of inventory is not an accurate reflection of cost, reducing comparability to companies using FIFO.
    • This low valuation affects the computation and evaluation of current assets and any financial ratios that include inventory, resulting in reduced comparability between companies using LIFO and others using FIFO.