1. What is FIFO Method?

FIFO (First-In, First-Out) is an inventory valuation method where the first goods purchased are assumed to be the first goods sold. This method is commonly used in accounting and inventory management.

2. How FIFO Calculation Works

The basic FIFO formula:

Where:

• Beginning Inventory — Inventory at start of period
• Purchases — Additional inventory purchased during period
• Sales — Inventory sold during period

COGS Calculation: Under FIFO, the cost of goods sold is calculated using the oldest inventory costs first.

3. Importance of FIFO Inventory

Details: FIFO provides a more accurate representation of inventory costs during periods of inflation, matches actual flow of goods in many businesses, and is accepted by both GAAP and IFRS accounting standards.

4. Using the Calculator

Tips: Enter beginning inventory, purchases, and sales in units. The calculator will compute ending inventory and COGS using FIFO method.

5. Frequently Asked Questions (FAQ)

Q1: When should I use FIFO method?
A: FIFO is best when inventory items are perishable or subject to obsolescence, or when prices are rising.

Q2: How does FIFO affect financial statements?
A: During inflation, FIFO typically shows higher ending inventory values and lower COGS compared to LIFO, resulting in higher reported profits.

Q3: What's the difference between FIFO and LIFO?
A: LIFO (Last-In, First-Out) assumes the most recently purchased items are sold first, which can reduce taxable income during inflation.

Q4: Are there limitations to FIFO method?
A: FIFO may result in higher taxes during inflationary periods as it tends to show higher profits. It may not match physical flow of goods in all businesses.

Q5: Is FIFO acceptable for tax purposes?
A: Yes, FIFO is generally acceptable, though tax regulations vary by country. In the US, LIFO is also permitted but requires special election.