FIFO valuation method
The FIFO method is an inventory valuation method that values sold inventory at the price of the oldest units.
The FIFO is a very useful accounting method when calculating the value of an inventory. This inventory, by its nature, can be of the company's products, the raw materials with which it works or also components necessary for its usual production.
The initials that give rise to its name come from the English expression «firts in, firts out«. That is, «lor that first comes in, first comes out«.
The initials that give rise to its name come from the English expression «firts in, firts out«. That is, «lor that first comes in, first comes out«.FIFO method
The FIFO criterion is very recurrent when evaluating inventories made up of expired or perishable products; In other words, the necessary order will be followed so that the parts that are released first are the closest to expiring or reaching obsolescence.
The basic difference with respect to LIFO is that the units that entered the warehouse in the first place are released. That is, the order changes.
In the first case, we could put as a simple example that of the food markets, where an attempt is made to sell products that previously reached stocks and that may have their preferred consumption date sooner.
As for the second, we would speak of a case less observable with the naked eye. Every year we can see this in markets such as fashion, where it is about selling at the end of the season products in stock for months or years and that, presumably, will not be "up to date" in the near future.
Following what has been said, the criterion set by the FIFO indicates that the unit to be sold next should be the one that has been in storage for the longest time, causing constant inventory renewal to avoid stagnation in the warehouse and the output of all the product.
FIFO method and prices
If we assume an economy where prices rise (that is, with inflation), the FIFO method can be useful when it comes to giving value to the products that we have in stock.
A large number of companies do it this way with the aim of selling products that were manufactured at lower prices and keeping those that cost more to produce stored. The image of the company would improve at first glance working in this way, a priori.
Why? Because each unit is valued at the price at the time it was added to the warehouse, so to speak. Then the company is giving way to the cheap in an economy of rising prices and conserving the most valuable.
Conclusion, we sell products valued in terms of manufacturing very low at market price, causing a greater profit for the company than if we sell later ones.