Glossary
First In, First Out (FIFO)
Tags: Glossary
Warehousing term meaning that the first items stored are the first used. In accounting, this term is associated with the valuing of inventory, such that the latest purchases are reflected in book inventory. While generally considered an accounting notion, FIFO usage is common where products may have a shelf life.
What is First In, First Out (FIFO)?
First In, First Out (FIFO)
First In, First Out (FIFO) is a warehousing term that refers to the practice of using the oldest items in inventory first. This means that the items that were stored first are also the first ones to be used or sold. FIFO is commonly used in industries where products have a limited shelf life, such as food, pharmaceuticals, and other perishable goods.
In addition to its warehousing application, FIFO is also an accounting concept that is used to value inventory. According to FIFO accounting, the cost of goods sold and the value of remaining inventory are calculated based on the assumption that the oldest items are sold first. This means that the cost of the most recent purchases is not reflected in the book inventory until all the older inventory has been used or sold.
The use of FIFO accounting is particularly important in industries where the cost of inventory can fluctuate over time. By valuing inventory based on the oldest items, FIFO ensures that the cost of goods sold accurately reflects the actual cost of producing or acquiring those goods. This helps businesses maintain accurate financial records and make informed decisions regarding pricing, profitability, and inventory management.
FIFO is a widely accepted and commonly used method in both warehousing and accounting due to its simplicity and practicality. By following the principle of using the oldest items first, businesses can minimize waste, reduce the risk of product obsolescence, and ensure that customers receive fresh and high-quality goods.
In conclusion, First In, First Out (FIFO) is a logistics concept that emphasizes the use of the oldest items in inventory first. It is commonly used in industries where products have a limited shelf life and is also an accounting principle for valuing inventory. By implementing FIFO, businesses can effectively manage their inventory, maintain accurate financial records, and provide customers with fresh and timely products.