FIFO

Module 4:
Inventory & Costing

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level

➛ Define the FIFO inventory valuation method

➛ Explain how FIFO works under inventory systems

➛ Calculate Cost of Goods Sold using FIFO

➛ Calculate Ending Inventory using FIFO

➛ Understand the effect of FIFO on profit

➛ Analyze FIFO’s impact on financial statements

➛ Identify businesses that commonly use FIFO

➛ FIFO | First In, First Out
➛ Inventory Valuation
➛ Cost of Goods Sold
➛ Ending Inventory
➛ Inflation
➛ Gross Profit
➛ Inventory Layers

FIFO assumes that

➛ The first inventory purchased is the first inventory sold

➛ The most recent purchases remain in ending inventory

FIFO reflects the actual physical flow of goods in many businesses.

FIFO is commonly used because it

➛ Is easy to understand and apply
➛ Matches real-life inventory movement
➛ Shows inventory at recent market prices
➛ Is allowed under IFRS and GAAP

Common FIFO users
➛ Grocery stores
➛ Pharmacies
➛ Clothing retailers

Example Inventory Purchases


Units Sold - 250

Units sold come from earliest purchases first

100 units @ $10
150 units @ $12

100 × $10 = $1,000
150 × $12 = $1,800
COGS = $2,800

Remaining inventory

50 units @ $12 = $600
150 units @ $14 = $2,100
Ending Inventory = $2,700

Income Statement
➛ Lower COGS | during inflation
➛ Higher gross profit
➛ Higher taxable income

Balance Sheet
➛ Inventory valued at recent costs
➛ Higher current assets

Answer True or False

➛ FIFO assumes newest inventory is sold first

➛ FIFO usually results in higher profits during inflation

➛ FIFO inventory reflects current market prices

➛ FIFO is not allowed under IFRS

1. FIFO stands for First ______, First ______

2. Under FIFO, the ______ inventory remains in ending inventory

3. FIFO results in ______ COGS during inflation

Inventory purchases
60 units @ $5
80 units @ $6

Units sold
100

Tasks
Calculate COGS using FIFO
Calculate Ending Inventory

Explain in 3-4 sentences

➛ Why grocery stores prefer FIFO

➛ How FIFO helps reduce inventory spoilage

A supermarket notices that older stock sells before new stock and wants inventory values to reflect current prices.

Questions

➛ Which inventory valuation method is suitable?

➛ Why does FIFO match the physical flow of goods?

➛ How does FIFO affect profit during inflation?

➛ How does FIFO improve balance sheet accuracy?

➛ What does FIFO stand for?

➛ Which inventory is sold first under FIFO?

➛ Does FIFO result in higher or lower COGS during inflation?

➛ Where does FIFO show higher values: COGS or Inventory?

➛ Name one business that commonly uses FIFO.

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Answers ➧ Here

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LIFO ➧ Here