What is FIFO in financial reporting?

What is FIFO in financial reporting?

FIFO stands for 'First In, First Out.' It's an inventory valuation method where the oldest inventory items are recorded as sold first.

How does FIFO affect financial statements?

Using FIFO can lead to higher profits during inflation, as older, cheaper costs are matched against current revenues.

Are there any disadvantages to using FIFO?

Yes, during periods of rising prices, FIFO can inflate profits and taxes, potentially misrepresenting cash flow.

Can you give an example of FIFO in practice?

Sure! If a company buys 100 units at $10 and later 100 units at $15, under FIFO, the first 100 sold would be recorded at $10.