Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Inventory valuation: Inventory valuation methods: First In First Out (FIFO)

  • As already pointed out in the introduction to inventory valuation methods
  • There are several valuation methods that can be used to determine the cost value of inventory
  • FIFO- First in First Out is one of these methods
  • Assumes that materials/inventories are issued out of inventory in the order in which they were delivered into inventory
  • The assumption is that the first items to be bought are the first items to be used
  • This is generally a very sound assumption
  • For example a fruit seller who buys and sells fruits obviously sell the old fruits first otherwise they would go bad
  • Similarly a business that turns meat into sausages would use the meat in order in which it was bought
  • This method is appropriate for most types of businesses as a result of this reasonableness
Cost of Sales/Used InventoryCost of closing inventory
For costing purposes, the first items of inventory received are assumed to be the first ones sold/usedThe cost of closing inventory is the cost of the most recent purchases of inventory.
  • Above is a summary of the assumptions behind FIFO
  • With this method of inventory valuation it is assumed that the oldest items of inventory are sold/used up in productioin first,
  • This leaves the business with the most recently purchased items
  • This provides an up-to-date valuation method for remaining items of inventory as it uses a recent purchase price to value the majority of goods
  • This is especially useful during inflationary periods as FIFO will see inventory being valued at current prices


Itai has closing inventory of 5 units at a cost of $3.50 per unit at 31 December 20X7. During the first week of January 20X8, Itai entered into the following transactions:

  • 2nd January – Bought 5 units at $4.00 per unit
  • 4th January – Bought 5 units at $5.00 per unit
  • 5th January – Sold 7 units at $10 per unit
  • 6th January – Bought 5 units at $5.50 per unit


  1. Calculate the value of the closing inventory at the end of the first week using FIFO

Solution to Example

  • We assume Itai sold the oldest inventory items first:
  • The first 5 items were taken from items from the Opening inventory leaving a deficit of 2 items which were fulfilled by taking from the items bought on 2 January
  • This leaves us with the following inventory:
    1. 0 items from Opening Inventory (5-5)
    2. 3 items bought on 2 January (5-2)
    3. 5 items bought on 4 January ( 5-0)
    4. 5 items bought on 6 January (5-0)
  • Thus the value of the closing inventory for the week is:
DateUnitsCost/Unit ($)Total Cost($)
1 January03.500
2 January34.0012.00
4 January55.0025.00
7 January55.5027.50




  • As shown the items purchased first are considered sold/used first
  • The above is a very simple example please click the links below to go to either the ZIMSEC Accounts Level page or the Cambridge AS/A Level page pages and select more examples on the topic

Advantages of FIFO

  • It is logical and represents the most logical flow of inventory
  • Easily understoond
  • Inventory values are up to date i.e. inventory is valued at the most recent prices we paid for it
  • Acceptable under the jurisdiction of almost all countries and under IAS 2
  • The cost per unit reflects the price actual paid for inventory items

Disadvantages of FIFO

  • Issue/Cost of Sales prices might be out of date especially in an inflationary environment for example if we bought inventory for $1 at the beginning of the year and the cost is now $1 000 per year due to inflation this will lead to distorted profit and inventory values
  • Profit is inflated during periods of rising prices
  • Makes costing comparisons between different jobs different for example the same job might have different material costs

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