FIFO (First In First Out) Method (Cambridge (CIE) AS Accounting): Revision Note

FIFO method

What is the FIFO method?

• The FIFO method is an inventory valuation method that assumes that goods are used in production or sold in the order in which they are received from the supplier

• The valuation of the remaining inventory will therefore always be the value of the most recently purchased item

How do I find the value of inventory using the FIFO method?

• There are two methods of recording inventory: 

  • Perpetual method 

    • Recalculating value of inventory after every purchase and sale 

  • Periodic method 

    • Inventory records only calculated at the end of the accounting period

Perpetual method

• After each purchase transaction

  • Calculate the total cost of the units purchased

  • Add this to the total value of the current inventory

• After each sales transaction

  • Subtract the cost of the units sold from the total value of the current inventory

    • Use the cost of the oldest inventory first until all of its units are sold

    • Then move on to the next oldest and so on

Periodic method

• STEP 1
  Calculate the number of units of closing inventory

  • 

• STEP 2

  Find the total cost of these units starting with the most recent purchase price and working backwards

  • E.g. if there are 30 units left and the most recent purchases was 20 units at $15 each

    • Then value 20 of them at $15 each to get $300

  • And if the next most recent purchase was 50 units at $25 each

    • Then value the remaining 10 at $25 each to get $250

  • Add the values together to get $550