Advantages and disadvantages of FIFO

The FIFO method has four main advantages (a) it is easy to apply (b) the assumed flow of costs corresponds with the normal physical flow of goods (c) no manipulation of income is possible and (d) the balance sheet amount for inventory is likely to approximate the current market value. All the advantages of FIFO take place because when a company sells goods the first costs it removes from inventory are the oldest unit costs. A company can't manipulate income by choosing which unit to ship for the reason that the cost of a unit sold isn't determined by a serial number. In its place the cost attached to the unit sold is always the oldest cost. In FIFO purchases at the end of the period have no effect on cost of goods sold or net income. The disadvantages of FIFO include (a) the recognition of paper profits and (b) a heavier tax burden if used for tax purposes in periods of inflation. We talk about these disadvantages later as advantages of LIFO.