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First in, first out method (FIFO)

Under the First in, first out (also well-known as FIFO, the first letters of each word) inventory valuation method, the first goods received are the first goods to be sold. Those goods purchased later are to be sold later so that the goods remaining in inventory are the most recently purchased ones. The closing inventory is valued according to the cost of these most recently received goods, and is shown on the income statement and balance sheet.


Goods Closing Balance

Purchased Sold Goods on Hand
Value of Goods
Monthly Total




$ $
20XX




Mar 20 at $20 each
20 at $20 each
400
Apr 30 at $25 each
20 at $20 each 400



30 at $25 each 750 1,150
May
10 at $20 each 10 at $20 each 200



30 at $25 each 750 950
Jun
10 at $20 each




10 at $25 each 20 at $25 each
500
Jul 20 at $30 each
20 at $25 each 500



20 at $30 each 600 1,110
Aug
10 at $25 each 10 at $25 each 250



20 at $30 each 600 850
Sep 30 at $35 each 10 at $25 each




20 at $30 each




10 at $35 each 20 at $35 each
700

The closing stock has the value of $700 as at end of September 20XX

The goods sold can still be the most recently purchased ones provided the cost of the goods sold is based on that of the earliest (the first) goods bought. Under this method, as the price of the goods increases the profit will become bigger. This is due to the much lower cost of the goods purchased earlier.

For example, assume that the entire batch of 20 units bought in February is sold in each sale, and that the selling price increases every month.

Date Purchased Sold (Monthly price increase) Profit



$
20XX


Feb 20 units at $30 each = $600

Mar
20 units at $36 = $720 120
Apr
20 units at $40 = $800 200
May
20 units at $45 = $900 300
Jun
20 units at $49 = $980 380

As can be seen on the table, the profit increases as the FIFO method is used.

Last Updated (Saturday, 09 October 2010 20:01)