First in first out (FIFO) definition
First in first out (FIFO)
First-In-First Out, also called FIFO, is an asset-management and valuation method where assets acquired or produced get used, sold, or disposed of first.
FIFO is often used for tax purposes. Assets with the oldest costs get included in the income statements for the cost of goods sold (COGS). The remaining inventory assets then become matched with assets that were recently purchased or produced.
How first in, first out works
Under FIFO, the cost of inventory purchased first is recognised first. The value of total inventory decreases during this process because it becomes removed from the company’s ownership.
As manufactured goods through development stages and sold as inventory, all the associated costs with that production are classed as legitimate expenses. This allows the FIFO method to be applied for cost flow accountancy purposes.