Accounting Demystified

First-In, First-Out

There is no requirement that the costing method chosen actually follow the physical flow of the goods. If we sold milk, it is not hard to imagine that we would try to sell the oldest milk (the first milk that came into the store) first. In that instance, the FIFO method would follow the physical flow of the goods. To use FIFO, it is necessary to keep detailed records of the number of units in each receipt of inventory and each sale. To illustrate FIFO, LIFO, and weighted average, we will use the same set of figures:

Jan. 4	Receive 1,000 units at a cost of $35 each
Jan. 5	Receive 1,250 units at a cost of $40 each
Jan. 7	Sell 500 units
Jan. 8	Sell 750 units
Jan. 9	Receive 2,000 units at a cost of $42 each
Jan. 10	Sell 1,000 units

There ...