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First-in-first-out (FIFO) is a method used by merchandising companies to manage their inventory and cost flow....

First-in-first-out (FIFO) is a method used by merchandising companies to manage their inventory and cost flow. A company using this method will assume that the first inventory in is the inventory that sells first and will track their cost of goods sold according to this assumption. To come up with the cost of goods sold using FIFO, a company will determine the cost of the oldest inventory and multiply it by the units sold. If the cost for the same item fluctuates, the amount of inventory acquired at a certain price needs to be taken into consideration.

Obsolescence, price-level changes, or damaged goods—decrease in market value of inventory should have been adjusted for the computation of Net realizable value.

Respond to the above paragraphs and share your opinion in one paragraph.

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Answer #1

First-in-First-out (FIFO) is a method of valuation of inventory. Name itself explain the method of valuation i.e. Cost of oldest inventory wether low or high is taken in consideration for sales. So, we can say the goods which produced first in the factory will be sold first. As per the accounting standards FIFO or average method is should be used for inventory cost valuation. The paragraph in the question explains about the valuation method of inventory, Cost of Goods sold, which are perfectly in compliance with the standrds and require no change in it.

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