FIFO stands for First In First Out, which is a method of inventory management. Explore the role of InvoiceTemple in managing the inventory.

Most of the items that we people use have expiration dates. The expiry dates are the previously determined dates before which the purchased item must be used. Some of the products with expiry dates are food items, beauty products, medicines, etc. For the sellers, it is crucial to sell these products before they reach the expiry date. This helps in preventing overstock of the products.  

It’s crucial for the business owners to track the inconsistent inventory valuation. The role of FIFO comes in managing this inventory. If you have no idea about this FIFO, then this blog is for you. Continue to read. 

First, you must know what FIFO is.  

FIFO is the abbreviation of the phrase “First In First Out”. FIFO is basically a cost assumption process. This is a process of selling out the products earlier that are purchased or produced by a business.  

Consider a shopkeeper is purchasing a set of 10 biscuit packets today and another set of 10 packets after 15 days. Now the shopkeeper preference will be in selling the biscuit packets that are purchased today. This is the basic concept of FIFO.  

FIFO: Minimum Wastage, Maximum Profit.  

Now you may have a basic idea of what FIFO is. Let’s see how to calculate the FIFO.  

For calculating FIFO, multiply the amount of the products sold with the cost of the oldest inventory. The FIFO value is crucial for the remaining inventory value calculation.  

The amount of the goods sold can be calculated by using the following formula.  

Cost of Goods Sold = Number of units sold × Cost of oldest inventory.  

Consider Ramu buying 100 face creams for the cost of $50 each in January and another set of 100 face creams for the cost of $75 each in February. He has sold the 50 face creams purchased in January. Now the cost of the goods sold is calculated as:  

50 × $75 = $3,750  

This calculation helps you in identifying the accurate inventory status.  

There are certain businesses that must calculate the FIFO value.  

• The businesses that sell the perishable goods.  
• Business that must consider inventorying quantity at the end.  
• Businesses that make international trades.  

Without any benefits, there is no use to make any calculations in the business. But performing FIFO has various benefits and some of them are listed below.  

• The key benefit of FIFO is that it gives an accurate analysis of the inventory costing of the business. This analysis helps the seller to make effective decisions regarding the inventory status. An idea about the replacement cost and profit ideas can also be identified through FIFO.  
• Numerous accounting software programmes are available for the effective calculation of FIFO. Replacing the old manual methods with advanced methods results in effective inventory management. This advanced method results in a faster process and increases the chances of increasing the profit for the business.  
• The FIFO process helps in the accurate calculation of net profit, which results in the uncomplicated generation of the financial reports. The occurrence of errors will be minimized and give an accurate profit report.  
• It helps in calculating the profit difference between the inventory of old products and current products. The cost of the goods may vary from period to period. As the cost prices vary, higher profits can be obtained in the businesses.  
• FIFO provides transparent and accurate values that increase the ability of the business as well as the trust of the customers towards the business.  

We hope that you get a clear idea about FIFO. Experience a smooth inventory flow using InvoiceTemple’s accounting software and attain maximum profit in your business.