FIFO – What is FIFO?
Definition: FIFO is a method of stock valuation that stands for ‘First-In, First-Out’. This assumes that the first (oldest) units of stock produced or received are also the first ones that are sold.
First in, First out
Under the FIFO method of stock valuation, a company assumes that the oldest items in stock are the ones being sold first – regardless of which units are actually sold first.
This way, if the price of production or the wholesale purchase cost of these items was different than the current price, you will account for these goods at the oldest value – not the current one. FIFO is the opposite of the LIFO valuation method, which conversely assumes that the most recent cost of stock should be recorded.
The FIFO and LIFO Methods are accounting techniques used in managing a company’s stock and financial matters. They help a company determine the value of their stock, raw materials, etc. They are used to manage cost flows assumptions related to stock and stock repurchases (if purchased at different prices).
FIFO vs. LIFO example
To show the difference between FIFO and LIFO, let’s use the example of a company that produces widgets. Let’s say that this company produces 500 widgets on Monday at a cost of £1 each, and 500 more on Tuesday at £1.25 each. Now they have 1,000 widgets in stock worth £1,125.00.
FIFO states that if the company then sold 500 widgets on Wednesday, their cost of goods sold for those 500 widgets is £1 per widget, or $500 (recorded on the income statement). That’s because this was the cost of each of the first widgets in their stock. The remaining 500 widgets would then be allocated to the company’s ending stock at £1.25 each (recorded on the balance sheet), resulting in an ending stock balance of £625.00.