First in First out (FIFO) Method with Example

The first in first out (FIFO) method is widely used to estimate the value of inventory in hand and cost of goods sold. The FIFO method assumes that inventory purchased first is first sold and the newer inventory remains unsold. In other words, the most recent cost of inventory remains in the balance sheet while the oldest cost assign to the cost of goods sold. It is the logical approach as oldest inventory is first sold and thereby reducing the risk of getting obsolete. The FIFO method is allowed by both Generally Accepted Accounting Principles and International Financial Reporting Standards.

The first in first out method can be applied to periodic inventory system or perpetual inventory system.  It provides same result for both periodic and perpetual inventory system.

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Example 1: (Periodic Inventory System)

Find cost of ending inventory, cost of goods sold and gross profit using FIFO method under periodic system. Take data from the given below table:

Date	Description	Units	Per Unit Cost	Amount
1-Jan	Inventory	100	20	2000
10-Mar	Purchased	200	25	5000
15-May	Purchased	100	25	2500
20-Aug	Sold	200	30	6000
10-Sep	Purchased	100	25	2500
15-Oct	Sold	200	30	6000
20-Nov	Purchased	100	25	2500
5-Dec	Purchased	200	25	5000

Computation for ending units/Units in hand:

Opening units	100
Total purchased units	700
Total units available for sale	800
Total sold units	400
Ending units/Units in hand	400

Computation for cost of ending inventory:

Abc Corporation
Cost of Ending Inventory
By using First In First Out Method

Date	Description	Units	Per Unit Cost	Amount
5-Dec	Purchased	200	25	5000
20-Nov	Purchased	100	25	2500
10-Sep	Purchased	100	25	2500
Cost of ending inventory				10000

Computation for Cost of Goods Sold:

Opening Inventory	2000
Purchases	17500
Cost of goods available for sale	19500
Ending inventory	10000
Cost of goods sold	9500

Computation for Gross Profit:

Sale	12000
Cost of goods sold	9500
Gross profit	2500

Example 2: (Perpetual Inventory System)

Find cost of ending inventory, cost of goods sold and gross profit using FIFO method under perpetual system. Take data from the above table:

Computation for ending inventory and cost of goods sold:

Computation for Gross Profit:

Sale	12000
Cost of goods sold	9500
Gross profit	2500

So we applied both periodic and perpetual inventory system in order to calculate cost of inventory, cost of goods sold and gross profit and we got the same result.