What is the central concept behind the First In First Out (FIFO) method?

The First In First Out (FIFO) method is based on the principle that the oldest items purchased are sold first. This approach is commonly used in inventory management and accounting for a variety of reasons, particularly in industries where products have a limited shelf life, such as food and pharmaceuticals.

When businesses apply FIFO, they assume that the first goods acquired are the first ones to be sold, which helps in accurately reflecting the cost of goods sold on financial statements. This can be particularly advantageous during times of inflation, as the older inventory is usually recorded at a lower cost compared to more recent purchases. This method ensures that inventory costs remain consistent with the actual flow of goods within the company.

Additionally, using FIFO can help businesses manage their inventory more effectively by preventing obsolescence and ensuring that products do not expire before they are sold. The FIFO method aligns with a logical and straightforward flow of inventory, making it easier for businesses to track their stock levels and manage supply chain activities.