Certified Materials and Resource Professional Practice

The First In, First Out (FIFO) method is the costing technique that approximates the current cost of inventory on the balance sheet. This method assumes that the oldest inventory items are sold first, which means that the remaining inventory on hand consists of the most recently acquired items. As a result, in times of rising prices, FIFO will reflect a higher cost in the inventory valuation, aligning more closely with the current market prices of those newer inventory items.

This can be particularly beneficial for financial reporting, as it provides stakeholders with a balance sheet that depicts a more realistic view of the current costs, as it does not mix older, potentially lower-cost items with more recent purchases.

In contrast, the other methods may lead to inventory valuations that reflect older costs, thus not aligning as accurately with current market conditions. Such differences can have significant implications for pricing, taxation, and overall financial health assessments.