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What is FIFO and how is it used for inventory cost accounting?

by Intuit•2• Updated 2 months ago

First In, First Out (FIFO) is a concept used by businesses that track inventory. As the name implies, QuickBooks Online will always consider the first units purchased (First In) to be the first units sold (First Out) and will adjust your assets and Cost of Sales (COS) accordingly whenever sales of inventory items are entered.

Here are sample scenarios to help you understand the concept of FIFO in QuickBooks Online.

Scenario 1: You purchased 20 widgets for $6 apiece. While they remain in inventory, the widgets are considered assets and are valued at cost. (Since you haven't sold any widgets yet, your COS for widgets is $0.)
Current Inventory: 20 units at $6 each Total Widget Assets: $120 Total Widget COS: $0

Scenario 2: Your customers show great interest in widgets, and you realise you don't have enough. You order 30 more widgets, but the price from your wholesaler has gone up to $7 apiece since your last purchase. When you record the purchase, QuickBooks Online adds $210 to your assets.
Current Inventory: 20 units at $6 each; 30 units at $7 each Total Widget Assets: $330 Total Widget COS: $0

Scenario 3: A customer purchases 15 widgets. Because the $6 units entered your inventory before the $7 units, QuickBooks Online applies the FIFO rule and values all 15 units in this order at $6 apiece. When you record the sale, the asset total for widgets is decreased by $90, and the COS for widgets is increased by $90.
Current Inventory: 5 units at $6 each; 30 units at $7 each Total Widget Assets: $240 Total Widget COS: $90

Scenario 4: Another customer purchases 20 widgets. When you record the sale, QuickBooks Online applies the FIFO rule and adds the $6 units first. Since you only have five $6 units in your inventory, the other 15 units for this order are valued at $7 apiece. Your widget assets are reduced by $135 (5x6 + 15x7), and your COS is increased by $135.
Current Inventory: 15 units at $7 each Total Widget Assets: $105 Total Widget COS: $225

As you can see, if you then sell more widgets from your current inventory to a third customer, they will all be valued at $7 apiece. Remember that FIFO has a consequence for reports that can be confusing unless you know to expect it. When you run a transaction report that includes a transaction on which two different rates occurred for the same inventory item, that transaction will have separate lines on the report for each COS or asset amount.

For example, if you recorded an invoice for the second customer in the scenario above, the transaction report would show two line items for that invoice: one with a $30 change in COS and/or assets, and another with a $105 change in COS and/or assets. This is intended behaviour, and the report totals and subtotals will be correct.

Modify the cost and initial quantity of an item

Entering the incorrect cost and initial quantity of the item during the initial set up will result in an incorrect value in the inventory asset account. To correct this:

Go to Settings ⚙ and select Products and Services.
Highlight the item, then select Edit from the Action column.
Select Starting Value.
Select Got it.
Enter the item's correct quantity and cost.
Select Save and Close.

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