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Simple English definitions for legal terms
FIFO
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A quick definition of FIFO:
Term: FIFO
Definition: FIFO stands for "First in, first out." It's a way of keeping track of inventory, which means the things a business has to sell. With FIFO, the first things a business buys are the first things it sells. This method usually makes the inventory look more valuable and can make the business look like it's making more money. But it can also mean the business has to pay more taxes. However, it can help new businesses get loans more easily. LIFO is another way of keeping track of inventory that works differently from FIFO.
A more thorough explanation:
Definition: FIFO stands for First in, first out accounting. It is a method used to calculate the value of inventory. In this method, the first items purchased are assumed to be the first ones sold or disposed of. This means that the oldest inventory is sold first, and the newest inventory is sold last.
FIFO accounting usually results in a higher recorded value of inventory and a higher net income than if LIFO (Last in, first out) were used. This can lead to higher income taxes, but it can also help new businesses get loans on better terms.
For example, let's say a store buys 100 units of a product at $5 each on January 1st and then buys 100 more units of the same product at $6 each on February 1st. If the store sells 150 units of the product, FIFO accounting assumes that the first 100 units sold were the ones purchased on January 1st, and the remaining 50 units sold were the ones purchased on February 1st. This means that the cost of goods sold would be calculated as 100 x $5 + 50 x $6 = $550.
This example illustrates how FIFO accounting assumes that the oldest inventory is sold first, which can result in a higher recorded value of inventory and a higher net income.