First-In, First-Out (FIFO) Method
The first-in, first-out (FIFO) method is based on the assumption that the costs of the first items acquired should be assigned to the first items sold. The costs of the goods on hand at the end of a period are assumed to be from the most recent purchases, and the costs assigned to goods that have been sold are assumed to be from the earliest purchases. The FIFO method of determining inventory cost may be adopted by any business, regardless of the actual physical flow of goods.
| Date | Transaction | Number of Items | Unit Cost | Total Cost | |
|---|---|---|---|---|---|
| June | 1 | Beginning Inventory | 50 | 1.00 | 50.00 |
| June | 6 | Purchased | 50 | 1.10 | 55.00 |
| June | 13 | Purchased | 150 | 1.20 | 180.00 |
| June | 20 | Purchased | 100 | 1.30 | 130.00 |
| June | 25 | Purchased | 150 | 1.40 | 210.00 |
| Totals | 500 | 625.00 | |||
Ending inventory: 220 units
150 units at $1.40 from purchase of June 25 150 * 1.40 $210.00
70 units at $1.30 from purchase of June 20 70 * 1.30 91.00
220 units at a cost of $301.00
Cost of Goods Available for Sale $625.00
Less June 30 Inventory 301.00 Cost of Goods Sold $324.00
The effect of the FIFO method is to value the ending inventory at the most recent costs and includes earlier ones in cost of goods sold. During period of consistently rising prices, the FIFO method yields the highest possible amount of net income, since cost of goods sold will how costs closer to the price level at the time the goods were purchased. The major criticism of the FIFO method is that it magnifies the effects of the business cycle on income.