What does FIFO stand for in inventory accounting?

FIFO stands for "First In, First Out," which is a method used in inventory accounting to determine the cost of goods sold and the value of ending inventory. This approach assumes that the oldest inventory items are sold first, ensuring that the costs associated with these items are recognized before those of more recently acquired inventory.

Using this method is particularly beneficial in industries where inventory items have a limited shelf life or are subject to obsolescence. It reflects the actual physical flow of goods in many businesses, such as grocery stores, where older stock is sold before new stock. By aligning inventory costs with the costs of the goods that have been sold, FIFO can provide a more accurate representation of profitability and financial performance during a given accounting period.

This method can also influence tax liabilities, especially during periods of inflation, as using FIFO may result in lower cost of goods sold and higher taxable income compared to other inventory accounting methods. Thus, understanding FIFO is crucial for effective inventory management and financial reporting.