FIFO (First In First Out)

First In First Out (FIFO) is an inventory accounting method used to determine cost of goods sold and the value of inventory on hand. Under FIFO, the first items purchased or produced are the first to be sold or disposed of, while the most recent items purchased or remain in inventory until older items are sold.

The main concept is that goods that are first or produced are the first ones to be issued or sold, and that any inventory remaining on hand reflects the most recent acquisitions.

For example, suppose a retail business sells a certain type of regularly and purchases a new batch of the product each month. In January, the business purchased100 units at $5 each, and in February, it purchased another 100 units at $ each. If the business sells 75 units in April, it would assume that the first75 units sold were from the January batch and would attribute a cost of $5 to each unit. The 25 units remaining in inventory would all be from the February batch and would therefore accounted for at $6 per unit.

FIFO is useful because it provides a straightforward method of inventory and determining the cost of goods sold, especially when dealing with perishable items with a lifespan. However, it can sometimes be disadvantageous, especially when prices fluctuate frequently.