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FIFO (First-In-First-Out): An inventory management method that assumes the first items received are the first items sold.
FIFO, or First-In-First-Out, is an inventory management method used to value inventory based on the assumption that the first items received are the first items sold. Under FIFO, the cost of goods sold is based on the cost of the oldest inventory, while the cost of the inventory on hand is based on the cost of the most recently acquired inventory.
FIFO is a common method used in accounting to calculate the cost of goods sold and the value of inventory for tax and financial reporting purposes. It is typically used in situations where prices are stable or declining, as it allows businesses to recognize lower costs of goods sold and higher taxable income.
There are several advantages of using FIFO in inventory management:
While FIFO offers several advantages, it also has some disadvantages, including:
Overall, FIFO is an effective inventory management method for businesses that want to improve inventory valuation accuracy and financial reporting. However, businesses must be aware of the potential disadvantages of FIFO and carefully evaluate whether it is the most appropriate method for their operations.