What does FIFO stand for in inventory management?

FIFO stands for "First In, First Out." This method of inventory management operates on the principle that the oldest inventory items are sold or used first, ensuring that perishable goods are managed effectively and reducing the risk of obsolescence. In practice, this means that the costs of inventory are determined based on the cost of the earliest purchases, which can provide a more accurate picture of profit margins, especially when prices fluctuate over time. As a result, FIFO can also impact financial statements and tax obligations; in times of rising prices, it often leads to lower cost of goods sold and higher taxable income because the older, cheaper costs are matched against current revenues. This method is particularly relevant for businesses dealing with perishable goods or products that may become outdated, as it helps maintain product freshness and minimizes waste.