4. The first in, first out (FIFO) method of inventory
valuation is a cost flow assumption that the first goods
purchased are also the first goods sold. In most
companies, this assumption closely matches the actual
flow of goods, and so is considered the most
theoretically correct inventory valuation method. The
FIFO flow concept is a logical one for a business to
follow, since selling off the oldest goods first reduces
the risk of obsolescence.
Overview of the First-in First-out
Method
5.
6.
7.
8. M
1. F
E
IF
T
O m
H
eth
O
od
D
is easy to understand and operate.
2.FIFO method is useful where transactions are not voluminous
and prices of materials are falling.
3. FIFO method is suitable for bulky materials with high unit
prices.
4. FIFO method helps to avoid deterioration and obsolescence.
5.Value of closing stock of materials will reflect the current
market price.
ADVANTAGES OF FIFO METHOD
9. DISADVANTAGES OF FIFO METHOD
1. FIFO method is improper if many lots are purchased during the
period at different prices.
2.The objective of matching current costs with current revenues
can not be achieved under FIFO method.
3.If the prices of materials are rising rapidly, the current
production cost may be understated.
4. FIFO method overstates profit especially in inflation.
10. CONCLUSION
The FIFO method is allowed under both Generally Accepted
Accounting Principles and International Financial Reporting
Standards. The FIFO method provides the same results under either
the periodic or perpetual inventory system.
