Benefits of FIFO
FIFO denotes first in first out and it is an inventory accounting system. As its name advocates, FIFO ensures that the first items to be put in the inventory are going to be recorded like the first items sold. Aside from acting like method of accounting for the inventory, FIFO has other advantages as displayed further down.
1. Offers realistic accounting
FIFO is generally viewed like the more candid reflection of an organization because accounting is being done for the first items introduced into the inventory like the first items sold. FIFO is particularly helpful when an organization has received several inventory shipments of items that are precisely alike. In such cases, accounting for the first item sold is nearly impossible.
2. Better asset accounting
Most of what public owned organizations do in context of accounting is used for impressing potential investors and current shareholders. Through accounting for first products received, the remaining inventory got later normally displays a better purchase price. FIFO allows companies to display better asset balance, thus conveying larger net value to investors.
3. Enhanced materials control
By using FIFO, businesses have a more continuous, orderly and systematic processing of inventory and materials. With items that can decay, lose value or deteriorate, it is better to trade and then account for them in whatever order they arrived in. FIFO is also applicable when controlling the materials from retailers to customers or suppliers to end distributors.
4. Promotes greater gross profit
FIFO is more beneficial when used during times of high rates of inflation. High inflation normally causes products to increase in value very quickly than during steady inflation. The first items sold will therefore display higher yields as they will have appreciated in value.
The disadvantage of FIFO is that it enhances chances of making clerical errors, especially if shipments are received regularly at changing prices.