What does the First In, First Out (FIFO) method assume about stock?

The First In, First Out (FIFO) method assumes that the stock purchased first is sold first. This means that the oldest inventory items are the first ones to be sold when products are sold off the shelves.

FIFO is based on the logical premise that products, particularly perishable goods or items that might become obsolete, are more likely to be sold in the order they were acquired. As a result, this method helps businesses manage inventory effectively by ensuring that older stock is sold before it becomes stale or outdated.

Under FIFO, when calculating the cost of goods sold, the costs associated with the oldest inventory are taken into account first, which can affect financial reporting and profitability. This also tends to align with actual physical flow of inventory in many businesses, particularly in retail and food service sectors, thereby providing a closely mimicked approach to real-world scenarios.