FIFO is better termed as a philosophy that companies use when evaluating the inventory of a business. Many food-based businesses, such as grocery stores, ensure that this principle operates by placing the oldest food items in the front and the newer ones in the back. FIFO itself is an acronym for ‘first-in, first-out’. FIFO method is the most common way of evaluating and calculating an organization’s inventory. The purpose of having a method for evaluating inventory is important because inventory is not all at a uniform price.
In a nutshell :
- First In, First Out (FIFO) is an accounting method in which assets purchased or acquired first are disposed of first.
- FIFO assumes that the remaining inventory consists of items purchased last.
- An alternative to FIFO, LIFO is an accounting method in which assets purchased or acquired last are disposed of first.
- Often, in an inflationary market, lower, older costs are assigned to the cost of goods sold under the FIFO method, which results in a higher net income than if LIFO were used.