FIFO stands for "First-In, First-Out" and is a method used for organizing the manipulation of a data structure where the oldest entry, or "head" of the queue, is processed first). In accounting, FIFO is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. The FIFO method is also used in inventory management, where it is an easy-to-understand inventory valuation method that assumes that the first goods purchased or produced are the first goods sold or used. The key features of the FIFO method are:
- Cost flow assumption: The first goods purchased are also the first goods sold or used.
- Assumption of oldest costs: For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statements cost of goods sold (COGS) .
- Accurate inventory records: FIFO helps businesses ensure accurate inventory records and the correct attribution of value for the cost of goods sold (COGS) in order to accurately pay their fair share of income taxes.
FIFO is the opposite of LIFO (Last-In, First-Out), where assets purchased or acquired last are disposed of first.
