FIFO
First In, First Out — an inventory accounting method assuming the oldest inventory items are sold first, resulting in lower COGS and higher profits during inflation.
Example
“Under FIFO during inflation, older cheaper inventory is expensed first — boosting gross margins compared to LIFO.”
Memory Tip
FIFO = First In, First Out. Oldest inventory sold first. Higher profits in inflation.
Why It Matters
FIFO directly affects how much profit a business reports and how much income tax it owes, which influences stock prices and investment returns. Understanding FIFO helps you evaluate whether a company is truly profitable or just benefiting from accounting methods during inflationary periods.
Common Misconception
Many people assume FIFO means a company must physically remove the oldest items from shelves first, but it is purely an accounting method that does not require actual physical rotation of inventory. A business can use FIFO accounting while selling inventory in any physical order it chooses.
In Practice
A bakery buys flour for 2 dollars per bag in January, then 3 dollars per bag in March, ending with 100 bags total. Under FIFO, when selling 80 bags, the company charges the cost of the 80 cheaper January bags, leaving 20 bags at the higher March price. This results in lower reported expenses and higher profits compared to other methods like LIFO.
Etymology
Acronym for First In, First Out. The FIRST items IN are the FIRST items OUT (sold).
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
Other accounting terms you should know
See Also
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