FIFO is understood as a method of accounting designed for the valuation of inventories, whether it is products, raw materials or components. It comes from English, "first in, first out" and in Spanish it is known as the PEPS method, "first inputs, first outputs". Since inventoried goods are not bought at the same price, for inventory valuation purposes you need a rule to determine how the remaining goods are to be valued.
What is the FIFO method?
Under the FIFO or FIFO system, the merchandise sold first is considered to be the oldest. For this reason, the prices of the oldest goods cease to average in the valuation of Inventory of the rest of the merchandise left in the warehouse.
Assuming that, as a general rule, and due to the inflationAs merchandise prices increase over time, eliminating older merchandise prices, for inventory valuation purposes, actually increases the average value of inventoried goods.
On the other hand, and, also as a general rule, for the purposes of calculating the economic performance of sales, older goods tend to have a lower cost. This means that there are companies that prefer to use other systems for valuation purposes, which are not, a priori, so favorable to economic performance. However, tracking inventory items in the FIFO is simple.
As disadvantages of the FIFO system, it can be pointed out that as the economic return from the sale of the merchandise that leaves the inventory increases, the amount of taxes that fall on them or on operations will also be greater. The reason behind the FIFO system is the need to avoid obsolescence.
Other widely used methods for accounting for the value of inventories are the LIFO, “last in, first out·, y el weighted average price.
Evaluate your stock in Excel with FIFO and LIFO