First-In, First-Out Inventory Valuation Method

First-In, First-Out (FIFO) inventory valuation method is based on the assumption that cost should be charged to revenue in the order in which they are incurred, that is, first units received are the first ones to be sold or the units sold in the order in which they were acquired. The flow of costs is presumed to be the same as usual flow of goods. The ending inventory is assumed to be consisting of goods most recently purchased. The FIFO formula assumes that the items of inventories which were purchased or produced first are consumed or sold first and consequently items remaining in inventory at the end of the period are those most recently purchased or produced. In sum, FIFO assigns the cost of the earliest units acquired to the issues and the cost of the most recent acquisition to the ending inventory. The assumption that goods purchased first are sold first is in accord with the good and efficient management practice that minimises losses from spoilage and deterioration. The cost of goods sold closely follows the price trend in market as the goods purchased are assumed to have been sold first.