Which inventory valuation method assumes that the oldest inventory items are sold first?

The First-In, First-Out (FIFO) method is an inventory valuation approach that operates under the premise that the oldest inventory items are sold before more recently acquired goods. In practical terms, this means that the costs associated with the earliest purchased products are matched against the revenue when those inventory items are sold.

FIFO is particularly relevant in environments where products have a shelf life or where older stock must be sold to maintain product integrity, such as in food and pharmaceuticals. As a result, during periods of inflation, FIFO typically results in lower cost of goods sold, thereby leading to higher profit margins and a higher inventory valuation on the balance sheet.

In contrast to FIFO, Last-In, First-Out (LIFO) assumes that the most recently acquired items are sold first, which can lead to different financial metrics. The Weighted Average Cost method averages all costs for calculation purposes, while Specific Identification tracks individual item costs. Thus, FIFO distinctly emphasizes the sequence of inventory flow based on the chronological order of acquisition.