In inventory accounting, what does FIFO stand for?

FIFO stands for "First In, First Out," which is a method used in inventory management and accounting to value inventory and manage the flow of goods. This approach assumes that the first items purchased or produced (the oldest inventory) are the first ones sold or used.

Using the FIFO method can be particularly advantageous in environments where inventory costs are rising because it allows businesses to match older, cheaper inventory costs against current revenues, potentially leading to lower cost of goods sold (COGS) and higher reported profits in times of inflation. Additionally, FIFO aligns with the physical flow of many types of inventory, especially perishable goods, where it is logical for the oldest items to be sold first to minimize spoilage.

This method is commonly accepted under various accounting standards, including GAAP and IFRS, making it a standard and reliable way for businesses to manage their inventory and financial reporting accurately.