fifo
FIFO means First In, First Out, an inventory method where the oldest stock a business bought is treated as the first stock it sells.
In plain English
Aunty Ngozi's provisions shop on the corner has a rule she never breaks. Every new carton of tin tomatoes goes to the back of the shelf, and the older cartons stay in front where customers can reach them first. She learned this the hard way after a batch expired at the back while fresher stock sold out front, and she took a loss she still talks about.
That shelf arrangement is FIFO in real life. First In, First Out simply means the goods that entered your stock first are treated as the goods that leave first, whether they physically leave first or not, for the purpose of counting cost and profit.
For accounting, this matters because prices change over time. If Aunty Ngozi bought her first batch of rice at ₦38,000 a bag and the next batch cost ₦45,000 because of new fuel prices, FIFO says that when she sells a bag, she records the cost as ₦38,000, the older and usually cheaper price, until that batch is used up.
A UK example works the same way. A small bakery in Leeds buying flour weekly will value the flour used in this month's loaves at the price paid for the oldest batch still on the books, even if a new delivery just arrived at a higher price.
The effect is that during inflation, FIFO tends to show higher profit on paper, because you are subtracting an old, lower cost from today's selling price. That higher profit looks good to investors but can also mean a bigger tax bill, so businesses choose their inventory method carefully.
A shop buys 100 bags of rice at ₦38,000 each in January and another 100 bags at ₦45,000 each in March. In April, it sells 120 bags. Under FIFO, the cost recorded is 100 bags at ₦38,000 plus 20 bags at ₦45,000, giving a total cost of ₦4,700,000, even though the shop may have physically grabbed bags from either batch.
Questions people ask
Does FIFO mean the actual oldest physical goods must be sold first?
Not necessarily. FIFO is mainly an accounting assumption for costing purposes. A petrol station cannot control which fuel molecules leave the pump first, but it can still use FIFO to decide which cost figure to record for each litre sold.
Why would a business choose FIFO over other inventory methods?
FIFO usually gives a more realistic consider of current stock value on the balance sheet, since the remaining inventory is valued closer to recent prices. Many businesses also find it simpler to apply and easier for auditors to follow.
How does FIFO affect profit compared to other methods during inflation?
During inflation, FIFO tends to report higher profit because older, cheaper costs are matched against current, higher selling prices. This can mean better looking results but also a larger tax obligation, so it is worth planning for.
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