The FIFO (first-in, first-out) inventory valuation method assumes the first goods purchased are the first goods sold. This assumption closely matches reality for most companies. FIFO reduces the risk of obsolete inventory by selling older goods first. It is easy to understand and operate, suitable when prices are falling or for bulky materials, and helps avoid deterioration and reflect current market prices. However, it may not properly match costs and revenues if lots are purchased at different prices or prices are rising rapidly.

2. 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

3. 1. FIFO method 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

4. 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.

5. EXAMPL
E

7. CONCLUSIO
N
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.