FIFO

FIFO assumes newest inventory is sold first
➛ False

FIFO usually results in higher profits during inflation
➛ True

FIFO inventory reflects current market prices
➛ True

FIFO is not allowed under IFRS
➛ False

1. FIFO stands for First In, First Out

2. Under FIFO, the newest (most recent) inventory remains in ending inventory

3. FIFO results in lower COGS during inflation

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

Units sold
100

Tasks
Calculate COGS using FIFO
Calculate Ending Inventory

Step 1 - Apply FIFO Order
First 60 units @ $5
Next 40 units @ $6

Step 2 - Calculate COGS
60 × $5 = $300
40 × $6 = $240
COGS = $540

Step 3 - Calculate Ending Inventory
Remaining units ➧ 40 units @ $6
Ending Inventory = $240

Explain in 3-4 sentences

➛ Why grocery stores prefer FIFO

➛ How FIFO helps reduce inventory spoilage

Grocery stores prefer FIFO because it ensures older products are sold before newer ones, reducing spoilage and waste. FIFO matches the physical flow of perishable goods. It also shows inventory at recent market prices, making financial statements more accurate.

⚠ Answers may vary but should include spoilage reduction, physical flow, and accurate valuation.

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?
➛ FIFO

Why does FIFO match the physical flow of goods?
➛ FIFO assumes older inventory is sold first, which reflects how goods actually move on shelves.

How does FIFO affect profit during inflation?
➛ FIFO results in lower COGS and higher gross profit during inflation.

How does FIFO improve balance sheet accuracy?
➛ Ending inventory is valued at recent purchase prices, giving a more realistic asset value.

What does FIFO stand for?
➛ First In, First Out

Which inventory is sold first under FIFO?
➛ The oldest inventory

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

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

Name one business that commonly uses FIFO.
➛ Grocery store / Pharmacy / Supermarket / Clothing store

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LIFO ➧ Here