FIFO | Meaning and Definition

The acronym FIFO stands for “First In, First Out.” It tracks the value of an organization’s inventory, assuming that the stock introduced first will also be used or sold first.

For taxation purposes, FIFO means that the assets with the oldest costs are included in the cost of goods sold (COGS) in the income statement. The remaining inventory is linked to the most recently purchased or manufactured resources.

FIFO is used to recognize the costs associated with a product as it progresses through various development phases and as final inventory items are sold. Under FIFO, the cost of items purchased first is recognized first. This reduces the dollar value of cumulative stock since the oldest inventory has been removed from the company’s holdings. Various methods can evaluate inventory costs, one of which is FIFO.

In markets with monetary expansion and price increases, FIFO can lead to lower costs being recorded for the goods sold because the older costs are usually lower than the latest inventory costs at higher current prices. This results in higher gross revenue due to the lower expense recognition. The final inventory value also appears higher since the newest goods were acquired at generally elevated prices.