FIFO (First-In, First-Out)

1. Definition

FIFO represents the inventory costing method where the first items purchased are assumed to be the first items sold.

2. Analogy

• Grocery Store: Selling the oldest milk first to prevent spoilage.
• Queue: First come, first served.

3. Financial Impact (During Inflation)

When prices are rising, FIFO results in:

1. Lower COGS (Cost of Goods Sold): Because the cheaper, older inventory is sold first.
2. Higher Net Income: Lower costs lead to higher reported profits.
3. Higher Ending Inventory: The remaining inventory consists of the more expensive, recently purchased goods.
4. Higher Taxes: Higher reported income leads to a higher tax bill.

4. Characteristics

• It is the standard method under IFRS (International Financial Reporting Standards).
• It generally matches the actual physical flow of goods.