Playing now

Playing now

What is FIFO method in accounting, and why is it important?

Glossary definition

What is FIFO method in accounting, and why is it important?

FIFO, meaning “First-In, First-Out,” is a costing method you can use to value your inventory or Cost of Goods Sold (COGS). The FIFO accounting method is important for inventory management companies looking to control costs and optimize inventory levels throughout the value chain.

From a cost flow perspective, FIFO assumes the first goods you purchase are the first goods you sell or dispose of. Not only does FIFO help you avoid inventory obsolescence, but it also follows the guiding principles of inventory management and is a relatively simple inventory costing method to use.

What are the main reasons for using FIFO?

Both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) accept the FIFO method. FIFO is even required by the IFRS in some regions.

Gross margins may be positively impacted when using the FIFO method during inflationary times. This happens when you have older, lower cost inventory matching to current-cost dollars of revenue. Higher income taxes may be a result.

You can learn much more about the pros and cons of the FIFO method from Investopedia.

Why is FIFO important?

FIFO is important for product-oriented companies because inventory control can make or break efficiency, customer satisfaction, and profitability. Knowing what items you have, what you sold, and what it’s all worth is essential to the health of inventory management businesses.

Sage Intacct Cloud Inventory Management System works together with your purchasing and order entry processes to keep you in control across locations from procure to pay.

Subscribe to our Sage Advice Newsletter

Get our latest business advice delivered directly to your inbox.

Working from home with tea in hand