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FIFO – First-In, First-Out.

Inventory accounting is one of the basic areas in
accounting. Business inventory accounts are usually difficult as different
items with different acquisition dates, and different accounting methods should
be applied to properly calculate cost of inventory on hand and cost of goods


An inventory accounting method should be established when
goods are acquired on different days and with different costs. Since costs differ
from the dates of acquisition, it may be difficult to calculate the cost of
goods sold and goods remaining on a balance sheet. A well known method of doing
so is the FIFO accounting method. FIFO assumes that the first goods purchased
will be the first ones to sell or first ones out the door. When applying the
FIFO method, while calculating the cost of goods sold we can assume that we
will fist sell the items that were acquired first.

For example, let’s assume that we have the following items
in inventory:

9 items at $1,700 acquired on April 5th,

6 items at $1,850 acquired on June 20th,

10 items at $1,600 acquired on July 18th,

We then sold 13 items on July 25th, 2011. Using
the FIFO method cost of goods sold results in the following:

We first sell the items acquired in April: 9 X $1,700 =

The remaining 4 items sold are taken from the inventory
acquired in June: 4 X $1,850 = $7,400.

This will result in a total cost of goods sold of $15,300 +
$7,400 = $22,700

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