First In - First Out (FIFO)

Also known as: FiFo principle

First In - First Out (FIFO) is a procedure that is used in warehousing and in which products manufactured or purchased first are removed first.

Definition / explanation

The FIFO method is a simplified assessment procedure. Elements that are acquired first are also sold or consumed first. An attempt is made to use assets that have been stored for a longer period first.

The FIFO method is best known in the food industry. The use of the product reduces the risk that foods with an expired best-before date are still in stock.

Angewendet wird First In – First Out bei sinkenden Preisen, während bei steigenden Preisen ein Verstoß gegen das Lowest value principle vorliegt. Das Verfahren ist handelsrechtlich für die Bilanzierung zugelassen, steuerrechtlich ist es jedoch nicht erlaubt (das LIFO procedure is allowed).

Reasons for using the method

  • is used to determine manufacturing and acquisition costs
  • higher profit with falling prices, since the lower and new procurement prices are applied
  • FIFO method basically assumes that the last products purchased are in stock

Example of the FIFO method

A Bauhaus buys a jigsaw on February 14th for EUR 83.00 and on June 27th for EUR 85.00. During the financial year, a jigsaw is sold to the customer for EUR 89.00.

Findet das FIFO-Verfahren Anwendung, so ist am Balance sheet date 31. Dezember die Stichsäge für 85,00 EUR noch auf Lager und wird mit 85,00 EUR bewertet. Liegt der Marktwert der Stichsäge zum 31. Dezember bei 84,00 EUR wird die Stichsäge aufgrund dem Lowest value principle valued at 84.00 EUR.

Effect on profit in the simple income statement (P&L):
Revenue EUR 89.00
- Expenses for purchased goods EUR 83.00
= Gross profit 7.00 EUR

Profit effect in the average rating:
Revenue EUR 89.00
- Expenses for purchased goods EUR 84.00 ((EUR 83.00 + EUR 85.00): 2)
= Gross profit 5.00 EUR

Summary

  • First In - First Out (FIFO) is a storage procedure
  • Products manufactured or purchased first are consumed first
  • FIFO is permitted under commercial law, but not tax law
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