The FIFO (first in, first Out) method is similar to LIFO (last in, first out) and keeps track of the price you paid for each group of units you receive at the same time at the same unit cost. However, FIFO costs your sales and values your inventory as if the items you sell are the ones that you have had in stock for the longest time. Select FIFO when you charge costs against revenue in the order in which costs occur. (FIFO generally yields the highest possible amount of net income during periods of constantly rising costs because costs increase regardless of the fact you can receive merchandise prior to the cost increase. In periods of declining cost, the effect is reversed.)
You received three different shipments for WIDGET01. The cost is then:
You sold 15 units:
10 units costed at $10.00 each = $100.00
5 units costed at $12.00 each = $60.00
Total Cost = $160.00
The next WIDGET you sell will post a cost of goods sold of $10.00 (the price of the first item purchased).
Creative uses for inventory items