![]() ![]() To think about how FIFO works, let’s look at an example of how it would be calculated in a clothing store. ![]() Since you’re calculating the difference between what a product sold for currently with the cost to the business of the inventory in the past, you’re likely to see more profit than the products you’re buying in real time.Īs you can see, the advantages with the FIFO method lead to it being the most popular inventory accounting method that is widely used across industries. Higher profit calculation: The cost of goods tends to increase over time.Easy to use and apply: When using the FIFO method, you can easily apply the principles by managing inventory costs for the most recent purchases as each is recorded in order.If you want to use a more complicated method, then you’ll likely need to find an expensive software or outsource your accounting. Software compatibility: Many accounting software options, including QuickBooks, only use the FIFO method to account for inventory.This leads to better accounting and more real-time analysis on where the business stands if it has a heavy amount of inventory. It aligns the current costs of the business with the actual flow of goods or inventory out of the business more accurately than any other method. ![]() Accurate cost analysis: FIFO provides the most accurate picture of what your inventory is costing the business at any given time.Here are the most common advantages of the FIFO method: From proper tracking of inventory to best serve customers to making sure your accounting software can manage the method you choose, FIFO has the edge over most other methods. FIFO is a popular method to account for inventory because there are many advantages. ![]()
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