Inventory Methods

The FIFO method has four major advantages:

• it is easy to apply,
• the assumed flow of costs corresponds with the normal physical flow of goods,
• no manipulation of income is possible, and
• the balance sheet amount for inventory is likely to approximate the current market value.

All the advantages of FIFO occur because when a company sells goods, the first costs it removes from inventory are the oldest unit costs. A company cannot manipulate income by choosing which unit to ship because the cost of a unit sold is not determined by a serial number. Instead, the cost attached to the unit sold is always the oldest cost. Under FIFO, purchases at the end of the period have no effect on cost of goods sold or net income.