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FIFO Accounting is one of the most common methods for calculating inventory values. This method counts stock at the end of accounting periods while simultaneously tracking the costs of goods sold. This inventory method states that older inventory will naturally be purchased or manufactured first and that newer inventory will be in-stock and unsold. As a result, the calculated cost of older inventory is equated with the cost of sold products and the cost of newer inventory is equated with products in inventory.
FIFO Explained
FIFO is commonly used to assign cost flows and identify inventory and manufacturing costs. The FIFO method is based on the fact that companies logically want to avoid product obsolescence and high inventory storage costs, so they will sell the oldest inventory items first and maintain the newest items. When raw materials are transformed into manufactured products and transported to storage, these associated costs must be recognized as an expense. The monetary value of total inventory will decrease as this occurs because an item has been sold.
When inventory items are processed and prepared to be sold, they are assigned certain costs. This usually includes the material, production, labor, shipping and storage costs. FIFO, which stands for “first in-first out,” assigns costs based on the chronological processing of products. To illustrate, 200 items are purchased for $20 and 200 additional items are purchased for $25. The FIFO method would assign the cost of the first items as $20, but after the initial 200 items were sold, the new cost would be $25.
Comparing Inventory Methods
According to Inc. magazine, there are four primary methods of inventory accounting: first-in, first-out (FIFO), last-in, first-out (LIFO), specific identification and weighted average. As explained above, the FIFO assumes that the oldest inventory is sold first, so the ending inventory value on the balance sheet will accurately reflect the current cost process. However, LIFO assumes that the last items purchased are also the most recent items sold. This method is not used for mass production, but for more rate, valuable and expensive items.
The LIFO cost of goods sold will be higher and the value of goods in inventory will be lower. LIFO assumes that prices increase over time, so LIFO profits are lower when compared to the FIFO method. The specific identification accounting method lists items on the balance at their actual cost. This accounting method is used for expensive products, like vehicles, jewelry and electronic equipment. Weighted average is used when mass produced products are physically indistinguishable from and easily substituted with similar products. The weighted average method sets a unit price for the average cost.
In closing, there are a limited number of careers available as FIFO inventory coordinators and accountant. These financial professionals usually work for manufacturing companies. They are expected to have a production background, a few years of facility experience, an understanding of GAAP and a bachelor’s degree in a finance or accounting. They will conduct inventory counts, reconcile balance ledgers, maintain inventory spreadsheets, calculate inventory reserves and conduct variance analysis on the FIFO accounting costs of products.