The Advantages of Fifo

In: Business and Management

Submitted By cacklin21
Words 311
Pages 2
FIFO stands for first-in, first-out which means that the oldest items in the inventory are recorded as being sold first. At the end of the year the items left in inventory are the ones that were most recently placed there.
FIFO Advantages
The FIFO method is simple to understand as well as to operate. The method makes sense because the products that are made or received first are the first ones to be utilized or sold. FIFO helps to reduce old or outdated inventory by using it first before the newer inventory is received and sold. Another advantage of the FIFO method is that the inventory is stated at the current cost since those items are the most recent items placed into the inventory as either unfinished or finished goods for the current period. Since the inventory on the books at the end of the period are the products most recently received, the current market price that is on the balance sheets actually reflect the true price of these items.
FIFO Disadvantages
A disadvantage to the FIFO method is the fact that prices fluctuate, which could lead to error since products are received at different prices. The store ledger clerk would need to check their record in order to determine the price to be charged. Also, current costs cannot be matched up to current revenues when using the FIFO method. Current sales are matched with products which were older and cheaper, ignoring the true cost of replacing those goods which were sold.

References

Gupta, R. (2011). Advantages and Disadvantages of First-in-First out Method (FIFO) . Cost Accounting. Retrieved from http://www.preservearticles.com/advantages- and-disadvantages-of-first-in-first-out-method-fifo.html

Johnson, J. (2012). The Advantage of the FIFO Inventory Method. Demand Media. Retrieved
from…...

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