Definition of FIFO
In accounting, FIFO is the acronym for First-In, First-Out. It is a cost flow assumption usually associated with the valuation of inventory and the cost of goods sold. Under FIFO, the oldest costs will be the first costs to be removed from the balance sheet account Inventory and will be the first costs to be included in the cost of goods sold on the income statement. Therefore, under the FIFO cost flow assumption the most recent costs will remain in Inventory to be reported on the company's balance sheet.
Example of FIFO
Let's assume that a company sold only one product and had 10 units on hand at the beginning of the accounting year with a cost of $19 each. During the year the company purchased an additional 145 units in this order: 40 units at $20, 50 units at $21, and 55 units at $22. Let's also assume that the company uses the periodic inventory system, the FIFO cost flow assumption and that 130 units were sold. Therefore, there will be 25 units remaining in inventory. With the FIFO cost flow assumption, the first costs to come out of inventory and become the cost of goods sold are: [email protected]$19 + [email protected]$20 + [email protected]$21 + [email protected]$22. The costs that remain in inventory will be [email protected]$22.