FIFO

First In First Out (FIFO) is a method of valuing stocks (inventory) for accounting purposes. Stocks issued (such as for sale or further processing) are assumed (for calculating the cost of sales) to be issued from the oldest available stocks.

This is the opposite of the assumption made for LIFO valuation.

An advantage of valuing stocks using FIFO is that the value of the the remainning stocks will be closer to the current market prices, therefore the balance sheet value or stocks will be more accurate.

Assuming positive inflation, FIFO increases profits by recording lower costs (old prices). It also increases the value of stocks recorded in the balance sheet. Given deflation, FIFO would have the opposite effect. While not the usual case, deflation of the value of stocks is normal in some industries.

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