First-In, First-Out (FIFO) Method

First-In, First-Out (FIFO) is one of the methods commonly used to calculate the value of inventory on hand at the end of a period and the cost of goods sold during the period. This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and that of newer inventory is assigned to ending inventory. The actual flow of inventory may not exactly match the first-in, first-out pattern.

First-In, First-Out method can be applied in both the periodic inventory system and the perpetual inventory system. The following example illustrates the calculation of ending inventory and cost of goods sold under FIFO method:

Example

Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.

Mar 1Beginning Inventory60 units @ $15.00 per unit
5Purchase140 units @ $15.50 per unit
14Sale190 units @ $19.00 per unit
27Purchase70 units @ $16.00 per unit
29Sale30 units @ $19.50 per unit

Solution

FIFO Periodic

Units Available for Sale= 60 + 140 + 70= 270
Units Sold= 190 + 30= 220
Units in Ending Inventory= 270 − 220= 50
    
Cost of Goods SoldUnitsUnit CostTotal
Sales From Mar 1 Inventory60$15.00$900
Sales From Mar 5 Purchase140$15.50$2,170
Sales From Mar 27 Purchase20$16.00$320
 220 $3390
    
Ending InventoryUnitsUnit CostTotal
Inventory From Mar 27 Purchase50$16.00$800

FIFO Perpetual

DatePurchasesSalesBalance
UnitsUnit CostTotalUnitsUnit CostTotalUnitsUnit CostTotal
Mar 1      60$15.00$900
5140$15.50$2,170   60$15.00$900
       140$15.50$2,170
14   60$15.00$90010$15.50$155
    130$15.50$2,015   
2770$16.00$1,190   10$15.50$155
       70$16.00$1,120
29   10$15.50$15550$16.00$800
    20$16.00$320   
31      50$16.00$800