Under the first-in, first-out (FIFO) cost flow assumption, the cost of the oldest item in inventory is removed when one of those items is sold. The oldest cost will be reported as cost of goods sold on the income statement, while more recent item costs will remain in the inventory account and will be reported on the balance sheet. For example, a book store buys a book from a publisher at a cost of $15 in September and pays $25 for the same book in December. If a customer buys one of these books, the store would record $15 as cost of goods sold while $25 would remain in inventory.
It is an abbreviation for first-in, first-out, a method employed in accounting for the identification and valuation of the inventory of a business.
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