FIFO (First In, First Out)

What is FIFO ?

FIFO (First-In, First-Out) is a widely used inventory management method in retail and merchandising. It ensures that the oldest stock (first-in) is sold first (first-out) before newer stock is used or sold. This approach is particularly beneficial for perishable goods and items with expiration dates.

Benefits of FIFO in Retail & Merchandising

Reduces Waste & Spoilage: Essential for businesses dealing with perishable goods like food, beverages, and cosmetics.
Maintains Product Freshness: Ensures customers receive the freshest products available.
Accurate Costing & Accounting: FIFO aligns with rising costs, preventing underestimation of inventory value.
Regulatory Compliance: Helps retailers meet health and safety regulations by reducing expired stock.
Better Stock Rotation: Prevents dead stock accumulation and maximizes shelf efficiency.

Implementation of FIFO

Stock Arrangement: Older stock is placed in front or at the top to encourage sales.
Barcode & Inventory Tracking: Retailers use POS (Point of Sale) systems to track batch numbers and expiry dates.
Regular Audits: Periodic stock checks ensure compliance with FIFO principles.

FIFO is ideal for supermarkets, pharmacies, and clothing retailers but may not be necessary for industries where products do not depreciate or expire quickly.

Frequently Asked Questions on FIFO

1. Why is FIFO important in accounting?

FIFO is used in accounting to determine the cost of goods sold (COGS) and inventory valuation. It usually results in lower COGS and higher profits when prices are rising.

2. What are the advantages of FIFO?

Reduces waste and spoilage (ideal for perishable goods).
Matches actual product flow in most businesses.
Ensures financial statements reflect recent costs.
Simplifies inventory tracking.

3. What are the disadvantages of FIFO?

May not be as tax-efficient in inflationary periods.
Higher profits can lead to higher tax liabilities.
Not always suitable for industries using non-perishable goods.

4. How does FIFO differ from LIFO?

FIFO: Oldest inventory is used/sold first.
LIFO (Last-In, First-Out): Newest inventory is used/sold first.
FIFO results in lower COGS during inflation, while LIFO results in higher COGS and lower taxable income.

5. Is FIFO required under accounting standards?

FIFO is accepted under IFRS and GAAP, but LIFO is not allowed under IFRS.

6. How is FIFO implemented in data structures?

In programming, FIFO is used in queue data structures, where elements are processed in the order they arrive (e.g., customer service systems, print queues).