What does 'FIFO' stand for in inventory management?

FIFO stands for "First In, First Out." This method of inventory management is based on the assumption that the first items added to inventory are the first ones sold or used. This approach is particularly useful in industries where products have a limited shelf life, such as food and pharmaceuticals, as it helps to ensure that older inventory is sold before newer stock. By applying FIFO, businesses can maintain accurate financial reporting and manage their inventory efficiently.

The FIFO method is advantageous in times of rising prices because it reduces the cost of goods sold, thereby potentially increasing gross profit on financial statements. This can also have tax implications, as lower cost of goods sold may result in higher taxable income. In summary, "First In, First Out" provides a logical and effective framework for managing inventory, ensuring that the oldest stock is utilized first, which helps to reduce waste and optimize cash flow.