1. What is FIFO Inventory Valuation?

First-In, First-Out (FIFO) is an inventory valuation method that assumes the first goods purchased are the first goods sold. This method follows the natural flow of inventory and is widely used in various industries.

2. How Does FIFO Calculation Work?

The calculator uses the FIFO formula:

Where:

• \( COGS \) — Cost of Goods Sold (currency)
• \( \text{Earliest Purchases} \) — Cost per unit from the oldest inventory (currency/unit)
• \( \text{Units Sold} \) — Number of units sold during the period (units)

Explanation: The FIFO method assumes that inventory items purchased first are sold first, which means the cost of the oldest inventory is used to calculate COGS.

3. Importance of FIFO Method

Details: FIFO provides a more accurate representation of inventory costs during periods of inflation, matches current revenue with older costs, and is generally accepted by accounting standards.

4. Using the Calculator

Tips: Enter the cost per unit from your earliest inventory purchases and the number of units sold. The calculator will compute the Cost of Goods Sold using the FIFO method.

5. Frequently Asked Questions (FAQ)

Q1: When should I use FIFO method?
A: FIFO is ideal when inventory items are perishable or when you want to match current revenue with historical costs, especially during inflationary periods.

Q2: How does FIFO affect financial statements?
A: FIFO typically results in lower COGS and higher ending inventory values during inflation, leading to higher reported profits and higher taxes.

Q3: What's the difference between FIFO and LIFO?
A: FIFO uses oldest costs first, while LIFO uses newest costs first. FIFO better reflects physical flow, while LIFO better matches current costs with current revenues.

Q4: Is FIFO acceptable under GAAP and IFRS?
A: Yes, FIFO is acceptable under both GAAP and IFRS accounting standards, while LIFO is only permitted under GAAP.

Q5: How does FIFO handle multiple inventory batches?
A: For multiple batches, you would calculate COGS by using the costs from the earliest batches first until all units sold are accounted for.