Fifo
First in, first out: the oldest costs go to cost of goods sold and the newest stay in inventory. With prices rising it reports lower expense, higher profit and inventory closer to current cost.
Where you will meet it
Fifo appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Contrast FIFO with the weighted average cost method
“FIFO assumes the oldest units are sold first; the weighted average cost method pools all units and applies an average.”
- Identify the reporting choices and biases that make companies' financial statements less reliable and harder to compare, and explain how such biases can sway financial decisions
“Inventory cost flow (FIFO, weighted average, or LIFO under US GAAP only), depreciation methods and lives, whether development costs meet the IFRS criteria for capitalisation, revenue recognition judgements, goodwill impairment assumptions, pension assumptions and lease or consolidation choices all change reported profit, assets and ratios.”
- Contrast cost flow methods for inventory and explain the LIFO reserve
“The LIFO reserve, disclosed in the notes, is the difference between the two valuations, and adding it to LIFO inventory converts the balance to a FIFO basis — which is what makes a LIFO reporter comparable with a FIFO one.”
- Analyse how the choice of inventory method changes financial ratios
“In a rising-price environment LIFO lowers reported inventory, gross profit, net income and total assets relative to FIFO, and raises cost of goods sold.”
See also
Learn it properly
Practise it
Practise fifo until it is automatic: questions that explain every wrong option.
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