FIRST IN FIRST OUT [FIFO]

FIRST IN FIRST OUT [FIFO]

FIRST IN FIRST OUT (FIFO): In this method stocks are issued in strict chronological order. That is the oldest materials are issued first and are issued at the rate at which they were received.

In other words materials in the store are issued according to their order of receipts into the store. Where there are opening stocks, they are treated as if there were issued first then the unit from the first purchase issued next. This method is not suitable in times of rising prices and inflation.

This is because issue price of materials to production will be low while the cost of replacement of materials will be high. This will in turn charge  a lower cost of goods sold to income statement.

This method follows the principle that items in the beginning inventory or materials purchased first are presumed to be charged to production first, therefore the items from the earliest purchase are issued next and so on. Thus all items left in the closing stock are deemed to have come from the most recent purchase, whereas those issued to production are from the earliest purchase.

Eyisi (2003:24)stated that this method is based on the based on the assumption that the oldest purchased goods are sold or issued out first and that most recently purchased goods are the closing stock balance. First-in-First- Out (FIFO)methods assigns to the issued [transferred]out stocks from the stores.

Hence the closing stock is measured by the costs of the units most recently acquired. The advantage of this method is that, it is assumed that cost of materials issued out in time of deflation reflects the previous stocks (material) acquired at a lower price.

According to the Farlex Financial dictionary (2012), First-in, First-out (FIFO) method is an accounting procedure for identifying the order in which items are used or sold. With FIFO, the oldest remaining items are assumed to have been sold first. During a period of inflation this tends to keep cost low for accounting purposes. It results in higher reported profits and a greater tax liability, however.

This method is most suitable in valuing agricultural products which are perishable and subject to a fairly speedy deterioration as time elapses. Also, it maybe used by Grocery stores which deals on items with high level of perishability. Also, this method checks material obsolescence, avoidable waste and deterioration. The method ensures that materials issued are at cost and therefore avoids unrealized profit or losses which may arise from a random issue of materials. And it is also a representative of current prices and thereby avoiding the use of outdated prices in valuing  closing stock.

This method is an actual cost system and it is acceptable to SAS 4. This method is also accepted by the Board of  Inland Revenue for tax assessment purposes in the word of Eyisi ( 2003:25) the disadvantage is that higher tax is paid as higher profit is been measured due to lesser cost at initial stage of purchase; which is issued out. This method is acceptable to inland revenue and is recommended by SSAP 9.

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