Your Ask Joey ™ Answer

What is FIFO in inventory accounting?

FIFO stands for “first in, first out” and is one of the most common types of inventory management techniques. Grocery stores are a great example of an industry in which FIFO is popular. It basically means that when they buy milk from a farmer, the oldest milk purchased is the first milk that is sold to the customer.

Have you ever noticed how grocery stores always put the oldest items up front? If they sold you the milk that they just bought yesterday vs the milk they bought last week, they would have more items spoil and that can be expensive for a grocery store!

So why is LIFO a bad inventory management technique for grocery stores?

If you can remember that example above for FIFO, then just remember that LIFO is the opposite. In this same scenario, LIFO would happen if the company took the freshest milk in their inventory and sold it to the customer instead of the older milk that was closer to expiration date. The customer would obviously want to have the freshest milk, but the grocery store would end up with a bunch of spoiled milk!

If you want to mess up a grocery stores inventory management for milk, grab milk from the very back!


Back To All Questions

You might also be interested in...

  • How to calculate days inventory outstanding (DIO)?

    Days inventorying outstanding, which is commonly referred to as days in inventory, is a metric that is used to describe the average number of days that are required to sell inventory. A higher amount of days indicates that a company is less efficient in converting inventory into sales.

  • What is an inventory rollforward?

    An inventory rollforward is prepared to understand the movements in the balance sheet and income statement. The inventory rollforward helps us understand beginning and ending inventory, purchases of materials throughout the year, as well as cost of goods sold. The visual below illustrates how an inventory rollforward is prepared. An inventory rollforward can be used...