First In, First Out (FIFO): The Daily Definition
What is First In, First Out (FIFO)?
FIFO is an acronym that represents the accounting concept known as “first in, first out.” In practice, the FIFO process means that the oldest products in your warehouse will be marked as sold first. Accountants using this method then assign a price to an item, assuming that inventory received first is sold first. It’s a plan of attack used to determine just how much it costs to stock your inventory.
Let’s take a look at FIFO from the viewpoint of an accountant who works for a company that sells baseball caps.
The warehouse manager ordered caps to stock up their warehouse on a few different occasions. In January, they purchased individual caps for $2, but now in August those same caps cost $3.25.
Using FIFO methodology, the accountant sets the price for all of the caps to $2. The original price for the item takes precedent over the later price. When the $2 caps runs out, the accountant adjusts the price to $3.25, reflecting that these caps are newly purchased items in their warehouse.
Our two cents:
FIFO is a cost flow assumption system that informs you on how much money you’re spending on product. This method is a useful way of making sure that your financials have up-to-the-minute accuracy.
With the FIFO method, your company’s balance sheet is most representative of your most recent costs. This gives you a more accurate view of the status of your inventory. It also keeps your warehouse workflow efficient and high-moving, making sure that older inventory is turned over on a regular basis.
If FIFO doesn’t fit your business’ process, there are other options. LIFO is the inverse system to FIFO, symbolizing a “last in, first out” method. It’s up to your warehousing and accounting staff to determine which system works best for your business.