First-in, first-out (FIFO)
From Wikicpa
Under the FIFO method, costs are allocated between inventory on hand and goods sold, on the assumption that goods are used in the order in which they are purchased; in other words, the first goods purchased are the first used (in a manufacturing concern) or sold (in a trading concern). The inventory remaining must therefore represent the most recent purchases.
To illustrate, assume that WikiEnterprises, LLC, uses the periodic inventory system, such that the amount of inventory is computed only at the end of the month. The cost of the ending inventory is computed by taking the most recent purchase and working back until all units in the inventory are accounted for.
The ending inventory and cost of goods sold are determined below:
| Date | Number of Units | Unit Cost | Total Cost |
|---|---|---|---|
| September 14 | 4,000 | $6.15 | $24,600 |
| September 22 | 4,500 | $6.50 | $29,250 |
| Ending inventory | 8,500 | $53,850 |
| Goods available for sale | $75,500 |
| Less: Deduct ending inventory | ($53,850) |
| Cost of goods sold | $21,650 |
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