What does FIFO stand for in accounting?

In accounting, FIFO stands for "First In, First Out." This method is used in inventory management and accounting to determine the cost of goods sold and ending inventory. Under FIFO, it is assumed that the oldest inventory items (the first ones that were purchased or produced) are the ones that are sold first.

This method is particularly useful in industries where products have a limited shelf life or may become obsolete over time, such as in food or technology sectors. As a result, reports generated using FIFO typically reflect the most current costs associated with inventory, as the remaining stock will consist of the most recently purchased or produced items. This approach can impact financial statements, tax liabilities, and inventory valuation, helping businesses manage their resources and cash flows effectively.

In contrast to the other choices, which either misinterpret the principles of inventory management or suggest incorrect terminologies, FIFO specifically addresses the order of inventory items being sold relative to when they were acquired. As such, it plays a significant role in providing accurate financial insights and maintaining compliance with accounting standards.