FIFO Method
First-In, First-Out
Under FIFO, the earliest inventory costs are assigned to cost of goods sold, while the newest costs remain in ending inventory. During periods of rising prices, FIFO generally reports lower cost of goods sold and higher ending inventory.
- Ending inventory reflects recent purchase costs.
- Lower cost of goods sold during inflation.
- Higher gross profit and net income during inflation.
- Inventory approximates current replacement cost.
Tip
FIFO generally produces the highest ending inventory value when prices are rising.
Summary
FIFO leaves the newest inventory costs on the balance sheet while assigning older costs to cost of goods sold.