Definition of Rotating Inventory Stock
To rotate stock means to arrange the oldest units in inventory so they are sold before the newer units. The goal is to avoid losses due to getting close to (or past) the sell by dates, deterioration, obsolescence, etc.
Expressed another way, to rotate the stock of goods on hand means that the physical flow of goods will result in the first or oldest goods being sold first. However, the accounting cost flows do not have to agree with the physical flow of the goods. This means that a U.S. business can diligently rotate its inventory items, and at the same time use the last-in, first-out (LIFO) cost flow assumption. (In periods of inflation LIFO means the higher/recent costs will be moved to the cost of goods sold while the older/lower costs remain in inventory. This can result in less taxable income and less income taxes.)
Example of Rotating Inventory Stock
A grocery store restocks its shelves by moving the oldest units to the front of the shelves and places the newest units in the back of the shelves. The hope is that the customer will select the most convenient (older) units from the front of the shelf.
In order for a company to avoid losses, it is important that the stock of goods in all locations (retail display area, warehouses, factory, etc.) be rotated.
When the grocery store rotates its stock, the units are physically flowing first-in, first-out (FIFO). However, in the accounting for the cost of inventory and the cost of the goods sold, a U.S. company is allowed to use a cost flow assumption which is different from the flow of the physical units.
