Legal Definitions - FIFO

FIFO stands for First In, First Out.

FIFO is an accounting method used to value a company's inventory and determine the cost of goods sold. Under the FIFO assumption, it is presumed that the first items of inventory purchased or produced are the first ones to be sold or used. This method impacts how a company calculates its profits and the value of its remaining inventory on its financial statements.

Here are some examples to illustrate FIFO:

• Grocery Store Produce: Imagine a grocery store that receives daily shipments of fresh fruits and vegetables. To minimize spoilage and ensure customers always get the freshest items, the store's inventory management system and staff are instructed to stock the newest produce behind the older produce already on display. When a customer buys an apple, the store assumes (for both physical and accounting purposes) that they are purchasing one of the apples that arrived earliest. This means the cost of the "first in" apples is matched against the revenue from their sale, leaving the cost of the "later in" apples as part of the remaining inventory's value.

• Computer Component Manufacturer: A company that manufactures custom computers purchases various components, such as memory modules. In January, they bought 100 memory modules at $50 each. In March, due to a supplier price increase, they bought another 100 modules at $55 each. When the company assembles and sells 120 computers, FIFO accounting dictates that the cost of the first 100 modules used in production is recorded at $50 each (from the January batch), and the remaining 20 modules are recorded at $55 each (from the March batch). This assumption directly affects the reported cost of goods sold for those 120 computers and, consequently, the company's reported profit.

• Fashion Retailer with Seasonal Stock: A clothing boutique receives new collections of designer handbags throughout the year. They received 30 identical handbags from the Spring collection in February at a cost of $200 each. In April, they received another 30 identical handbags for the Summer collection at a cost of $210 each (due to increased material costs). When the boutique sells 40 handbags, FIFO accounting assumes that the first 30 handbags sold came from the February shipment (the "first in" stock), and the next 10 handbags sold came from the April shipment. This method helps the retailer value its remaining inventory (the 20 handbags from the April shipment) and calculate the cost associated with the handbags that were sold, influencing their financial reporting.