Accounting: The Language of Business - Vol. 2 (Intermediate: Part 163)

Proverbs 27:23

Know well the condition of your flocks, and give attention to your herds,

 Short-Term Operating Assets: Inventory (Part I)

by

Charles Lamson

First-In, First-Out Method

The first-in, first-out (FIFO) method assigns the most recent costs to ending inventory and the oldest cost to cost of goods sold. Under a perpetual system (a computerized system that continuously tracks and records inventory levels in real time), the company records the cost of goods sold at the point of each sale.

FIFO is conceptually sound for firms selling products that can perish or are subject to style changes, obsolescence, or rapid technological changes. The FIFO cost-flow assumption accurately portrays the actual flow of goods in most companies. For example, it is logical that a computer manufacturer will attempt to sell its oldest models first because they will certainly be replaced by units with more advanced technology. Example 10.8 illustrates the FIFO method.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 521-523*

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